It is in the interest of any government to facilitatecitizen welfare at any stage of their lives whether young, middle-aged or old.For this reason, many governments come up with numerous programs especiallythose that are supposed to make sure that people continue to enjoy a decentliving even after they retire. Singapore has such a program called the CentralProvident Fund (CPF).
Why do CPFcontributions exist?
The CPF exists as a retirement savings scheme. It is thereso that Singapore citizens can secure their lives after retirement so that theywill have enough money to pay bills, afford food and other amenities that theywill require in their retirement. Singapore residents are required to pay a CPFcontribution as long as they are employed. This applies to Singapore citizensand also those who are permanent residents in the country. Below are somethings that you should probably know about the CPF and CPF contribution rates.
Every working citizen in Singapore is required by law to paythe CPF contribution every month. The payment is supposed to be made at the endof every month although there is a 12-day grace period. Employers in Singaporeare obligated to deduct the CPF contributions for their employees. This especiallyapplies to those working in the formal sector, and the amount is deductedautomatically from their salaries. It is, however, worth noting thatself-employed people do not have to contribute anything to the CPF.
The age of the employees determines CPF rates. For example,those under 55-years-old pay 17% of their monthly income while employers pay20%. Below is a chart that demonstrates the rates paid by the contributors bothemployee and employer.
Note that the CPF rates are subject to change by thegovernment although the above are the currently prevailing rates. The CPFpayment system is structured such that both employer and employee makecontributions. This means that employers also contribute to their employees’CPF.
Judging by the above CPF contribution rates, a person whoearns a considerable income will be forced to pay a sizable amount to the CPF.However, that is not necessarily the case because there is a CPF contributioncap which is designed to make sure that employees do not end up having to paytoo much. The cap is called the CPF Wage Ceiling, and it has two distinctparts.
- The ordinary wage ceiling is a monthly salarycap that limits the maximum contribution to $6,000. This means that only thefirst $6,000 from an employee’s salary will be subjected to the CPFcontribution. It also protects employers from having to pay too much. In thiscase, employers only have to pay the CPF for the first $6,000.
- The Additional Wage Ceiling refers to a CPFcontribution cap that is set so that employees do not have to pay extracontributions from any extra wages or bonuses that they earn. The additionalwage ceiling is capped at $102,000 for the entire year. This means that bonusesare also subject to contribution, but only annual amounts below theabove-mentioned amount are subject to the CPF deduction.
The different typesof CPF accounts
It is important to note that there are different types ofCPF accounts and each of them has a specific use. This means that employers mayuse the saved amount for various purposes depending on the selected type of CPFaccount. Below are the different types and their uses.
- Ordinary account- This is a CPF account thatallows the employee to use the saved amount for purposes such as investing,paying for higher education and housing. The account holder can use anyremaining amount as a fall back once they retire.
- Special account-This account specificallyfocuses on saving money for retirement although the money can also be investedto some extent.
- Medisave account- Just as the name suggests,this is an account that is designed to cater to any expenses arising frommedical reasons such as hospitalization. The money from such an account canalso be used to pay for Medishield which is a basic health insurance plan inSingapore.
- Retirement account- this is a CPF contributionthat is set up primarily with the goal of saving for retirement. In short, thisis an account that one sets up for their retirement savings. This type ofaccount is only available when one turns 55-years-old. Upon this stage, theirordinary account and special accounts are combined to form a retirementaccount.
Now that we have already understood the different types of CPFaccounts that are available, we can dive into how these accounts receive theirshare of the CPF contribution. Individuals that earn more than $750 and abovein monthly wages have their CPF contributions between different accounts in aprocess known as CPF allocation. Below is a chart that demonstrates how theallocation is done.
The CPF allocation is designed such that more money isallocated to an individual’s ordinary account when they are young than theamount allocated to their Medisave account. This is because the young areenergetic and have statistically fewer health problems than those in the oldage bracket. The youth also focus more on securing funds for things likehousing.
However, things start to change as one gets older and moremoney is allocated to the special account in preparation for retirement andalso into the employee’s Medisave account in preparation for healthcare needs.The contributions for the Ordinary account and the Special account declinedrastically when an individual reaches 55-years-old. The contributions for theMedisave account remain high because people are likely to have more medicalneeds at old age.
Although the CPF contributions are mandatory for theemployed, it is best to view them as an opportunity to manage one’s income moreefficiently. Additionally, Singapore residents get to use the money saved intheir CPF accounts for various purposes such as buying a home, investing andcatering to their medical expenses. The system is therefore designed to makelife easier for Singapore citizens.
(By Neha Gupta)