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Understanding the Intricacies of Your CPF Account
Singapore’s citizens and permanent residents have the privilege of being members of the country’s Central Provident Fund (CPF). About 3.7 million individuals have CPF accounts. This government institution which has its activities overseen by a 15-member board provides Singaporeans with a comprehensive social security system.
Balances are accumulated by the contribution of a certain percentage of each member’s salary into the CPF account every month. This sum is enhanced by the amounts paid by the individual’s employer.
The greatest benefit that an account in the CPF provides is security. Every person has the assurance that the balance is absolutely safe and is available to provide a regular income upon retirement.
However, all the money is not kept in one single account. Each individual has three separate accounts. It is important to understand what these are and how they can be used.
Each member has three accounts
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CPF contributions are channelled into an Ordinary Account, a Special Account, and a Medisave Account. On your 55th birthday, a fourth account, the Retirement Account is created.
Ordinary Account – the balance in the Ordinary Account can be used to purchase a house, finance your education, and provide basic life insurance.
Life insurance is provided in the form of a term policy called the Dependents’ Protection Scheme, which has a maximum sum assured of S$46,000. This scheme is automatically extended to CPF members, but they may decide to opt out.
The insurance premium for the Dependents’ Protection Scheme is:
Age (Last Birthday) | Yearly Premium |
34 years and below | S$36 |
35-39 years | S$48 |
40-44 years | S$84 |
45-49 years | S$144 |
50-54 years | S$228 |
55-59 years | S$260 |
Special Account – the money in this account is specifically set aside for a person’s old age. Funds are invested in retirement-related financial products. The interest rate on Special Accounts is higher than the rate paid for Ordinary Accounts.
This rate is reviewed on a quarterly basis and is fixed at the higher of:
A floor interest rate of 4% p.a. or
The 12-month average yield of 10-year Singapore Government Securities (10YSGS).
In view of current interest rates being low, the floor rate of 4% p.a. has been extended up to December 2017.
Medisave Account – the interest on the balance in the Medisave Account is computed in a manner similar to the calculation used for the Special Account. Consequently, the Medisave Account currently earns 4% interest every year.
Funds in this account can be used for hospitalisation expenses and for approved medical insurance schemes.
55 – an important milestone
When you reach the age of 55, a fourth account, the Retirement Account, is automatically created for you. The savings in this account currently earn interest at the rate of 4% p.a.
At the age of 55, you also have the option of withdrawing your CPF savings. How much can you withdraw?
This chart will give you an idea about withdrawal limits:
Cash balances in Ordinary Account and Special Account at 55 | Amount which you can withdraw at 55 |
S$5,00 or less | All your Ordinary and Special Account savings |
Between S$5,000 and your Full Retirement Sum |
|
More than your Full Retirement Sum |
|
Note – the Basic Retirement Sum is an amount that will be used to provide you with a regular monthly income to support a basic standard of living. The Full Retirement Sum is double the Basic Retirement Sum. For a person born in 1961 (who turned 55 in 2016) the Basic Retirement Sum has been fixed at S$80,500.
You can get further details in this useful booklet titled CPF: Your Assurance in Retirement.
CPF Education Scheme
You can use your Ordinary Account savings to finance your education. CPF rules permit you to pay tuition fees at approved institutions by taking a loan from your accumulated balance. You are required to start repayment within one year of graduation.
In fact, under the CPF Education Scheme, you are even allowed to borrow to pay for the courses undertaken by your children or by your spouse.
The loan you take can be repaid over a maximum of 12 years. The interest charged is pegged to the prevailing interest rate for Ordinary Accounts.
Use your Medisave savings to buy additional health insurance
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All Singaporeans are covered by MediShield Life, the national health insurance scheme. But many individuals prefer to get additional health insurance coverage. This can be done by opting for an Integrated Shield Plan (IP).
IP offers the insured person certain benefits in addition to the coverage already available under MediShield Life. Your Medisave Account balance can be used to pay for IP. The additional insurance protection plan can be purchased from any one of six approved private insurers.
How well do you understand CPF rules?
Although your CPF savings provide great benefits, the number of rules governing how you can use your accumulated balances can be confusing. It is advisable that you spend some time to understand the various schemes that are available to you as a CPF member. A little effort in this direction can yield a significant financial advantage in securing your retired life.
(By Ravinder Kapur)
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