Millennial Money: Make your CPF savings work harder for you

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·5 min read
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Millennial Money: Make your CPF savings work harder for you. (PHOTO: Getty Commercial)

SINGAPORE — As youths graduate and take on their first jobs, it is important for them to understand the Central Provident Fund (CPF) scheme and how they can maximise and grow their funds.

This is part of a series where Yahoo Finance Singapore will focus on different aspects of millennials and finance. In this fifth part, we explore more on everything that young adults need to know about the CPF scheme in Singapore.

What is CPF?

The general consensus among youths is that the purpose of CPF is for one’s future retirement.

“When I think of CPF, I think of a compulsory savings scheme that intends to ensure most Singaporeans have adequate savings for their retirement,” said Tay Wee Teck, 21, an incoming university undergraduate.

Similarly, 21 year-old Celine Low, an economics undergraduate, said: “I think that CPF is setting aside a sum of money to use for the future when I am old enough to buy a house and eventually have some money in my nest egg for my retirement.”

The CPF is a mandatory social security savings scheme for Singaporeans and permanent residents funded by contributions from employers and employees. There are three different accounts available: Ordinary Account (OA), Special Account (SA) and Medisave Account (MA).

The OA is generally used to pay for one’s housing, insurance, investment and education. The SA is used for old age and investment in retirement-related financial products, while the MA is reserved for hospitalisation and approved medical insurance.

Common misconceptions

Interestingly, financial experts have highlighted a key misconception that youths often think that only 20% is deducted from their pay to be transferred into their CPF accounts. However, the actual figure that workers up to 55 years old get in their CPF is 37%. This is because companies are required to make an additional 17% contribution for each employee.

There is a contribution cap — only the first S$6,000 of your monthly salary is subject to CPF contributions. Any amount above that won’t be subjected to CPF deductions. It also means your employer doesn’t need to contribute to your CPF account. Do note that the CPF contribution rate changes for those above the ages of 55.

Youths also think that the government is ‘locking away their money’ and that that sum of money cannot be touched until you are old.

“I know that there are varying views on CPF, but from what I understand of it, it is mandatory to set aside a portion of your salary for retirement that you can only take out when you are 55 years old,” said fresh graduate Celestee Low, 23.

The truth is that CPF is essential for society as it is not guaranteed that the entire population is financially literate, said Ezekiel Chew, founder and CEO of Asia Forex Mentor, an online trading mentoring service.

“CPF is a scheme to provide financial support and security to everyone regardless of their financial background. Even if the majority of the population is well aware of the concepts of investment, not all will be successful,” said Chew.

According to Chew, youths also think that nothing can be done to their CPF beyond monthly salary contributions.

Such views are backed by a recent survey by insurance company Manulife which found that 1 in 3 retirees continue to work post-retirement to increase their savings. Meanwhile, 1 in 2 retirees indicated that they would need to supplement their CPF savings with other sources of income.

Thankfully, that should not be the case as youths can take advantage of their CPF to potentially invest their CPF savings through brokerages or services.

“While one might not receive pay outs in cash, it could still help to grow their CPF value. The additional funds could be beneficial when eventually used for housing or educational payments,” said Eng Thiam Choon, CEO of brokerage firm Tiger Brokers Singapore.

Eng proposes using a range of different investment options such as unit trusts, investment-linked insurance products, annuities, endowment policies, Singapore Government Bonds and treasury bills.

Benefits of CPF

One of the biggest benefits of the CPF system in Singapore is the extra risk-free interest of up to 5% per annum from one’s SA account for those up to 55 years old. How it works is that on top of the 4% interest per annum, the government will pays extra interest 1% interest on the first S$60,000 of your combined CPF balances (which is capped at S$20,000 for the OA). 

With this interest, along with one’s employer’s contributions, youths can grow their money up to as much as eight times over 40 years, said Chuin Ting Weber, CEO of MoneyOwl, a bionic financial advisor.

“Leaving your CPF savings within the system to grow with the power of compound interest can grow your S$1 into more than S$8. That’s a whopping 800% growth,” said Weber.

Another benefit of CPF is tax relief, where youths can earn a tax relief of up to S$7,000 per year for cash top-ups under the Retirement Sum Topping-Up Scheme. According to the CPF Board’s statistics in 2020, over 140,000 CPF members made top-ups, contributing a total of S$2.97 billion.

However, the CPF Board limits the top-up to the prevailing Full Retirement Sum which is at S$186,000 currently. As such, financial experts have cautioned that youths should contribute to their CPF earlier to maximise its benefits.

“Your working contributions continue to go into your SA according to the allocation for your age. This means that the earlier you top up, the more you can benefit from the compounding, risk-free return,” said Weber.

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