CPF is a complicated system, and every time I delve into it, I discover new aspects.
One recent revelation was regarding the Special Account (SA) top-ups.
There are benefits to topping up CPF Special Account. For instance, per year, members can get tax relief of up to $8,000 for themselves and another $8,000 for parents, parents-in-law, grandparents, grandparents-in-law, spouse, and siblings.
Moreover, the Special Account interest rate is at 4.08%, which is higher than the Singapore Government Bonds, which yield at most 3.03% at the time of writing. Both are backed by the same government
Therefore, it’s no surprise that some CPF members are drawn to the benefits of topping up their or their loved ones’ Special Accounts.
Since the Retirement Account (RA) will be funded by the Special Account first, one can compound the SA savings by topping up, allowing them to grow faster and potentially exceed the Full Retirement Sum (FRS) requirement by age 55.
Starting in 2025, any excess funds will flow to the CPF Ordinary Account (OA), and the SA will be closed when one turns 55.
At 55 years old, a CPF member can choose to withdraw the remaining amount after setting aside the FRS. If they pledge their property, they can withdraw even more. However, the fine print states that interest earned, government grants, and top-ups cannot be withdrawn because these funds are meant for retirement purpose.
An important consideration is that your cash top-ups to the SA will not be available for lump sum withdrawal from age 55. These amounts will be used to increase your CPF LIFE monthly payouts in retirement. Therefore, you must consider the CPF LIFE monthly payouts you want before deciding to top up your CPF SA. It’s a one-way street.
Your CPF contributions to the CPF SA as part of your employment will not be subject to this lock-up. You can withdraw them from age 55 after setting aside the required FRS amount.
You might wonder what happens to the monies you transfer from OA to SA. These are also considered top-ups and will be treated as non-withdrawable savings.
If you had kept it in the OA, you would have been able to withdraw it at 55 after meeting the FRS. But transferring from OA to SA inadvertently locks it up and subjects it to CPF LIFE rules. Hence, you need to be clear about the implications before topping up or transferring OA to SA.
Ultimately, I think this is fair. One cannot treat the CPF SA like a high-interest savings account and expect the flexibility to withdraw the money simultaneously. In the financial markets, there isn’t a product that matches CPF SA in terms of risk and return. The additional interest comes at a price—it is meant solely for your retirement, hence the lock-up. There is no free lunch in this world.
Many Singaporeans and PRs do not have an appetite for risk and prefer not to invest in most financial instruments due to the fear of loss. Topping up becomes a means to earn higher interest. However, we cannot be overly reliant on the system and must grow our savings and nest egg independently. This doesn’t necessarily mean investing in stocks or risky investments. There are enough alternatives for the average person to consider, such as Singapore Savings Bonds, SGS Government Bonds, Money Market Funds, and Fixed Deposits. These are relatively low-risk, though they won’t match CPF SA interest rates, but they will not be subject to a long-term lock-up.