Note: The primary purpose of CPF is to ensure that we have a sufficient sum of money set aside for our retirement needs. While this article suggests using CPF as a tool to prevent those with children from recklessly spending their inheritance, it is important to recognize that this is a radical approach and not the primary intent of the CPF system. This strategy is only applicable to individuals who have already secured their own retirement and are now focusing on inheritance planning.
Even though your children share the same genes, they may not share the same financial temperament. We all know some children who may struggle with managing money and could potentially squander any wealth passed down to them. It’s natural for parents to be concerned about the financial habits of their children, especially if they tend to be spendthrift.
Typically, a trust would be the go-to solution to manage this concern. Instead of passing down the entire wealth at once, you can instruct the trust to dispense regular sums of money to your child after you’re gone. However, setting up a trust doesn’t make sense if you don’t have sufficient wealth to justify the costs. Establishing a trust can cost at least thousands of dollars upfront, with additional thousands of annual fees to maintain it.
So, what can the average person do? I’ve considered a radical alternative—using CPF as a ‘trust’. Although CPF is primarily meant for retirement, its utility can extend beyond that.
Top Up Your Child’s CPF Special Account
Treating your child’s CPF Special Account (CPF SA) as a ‘trust’ is possible because you can top up their CPF SA to the Full Retirement Sum (FRS). The current FRS is $205,800 in 2024, and this amount will increase each year with the rising cost of living, increase in life expectancy and increase in standard of living.
The advantage of CPF SA, is that the CPF savings are designated strictly for retirement and cannot be withdrawn for expenditures such as housing. This restriction prevents spendthrift children from accessing the money until retirement. Even then, they won’t receive a lump sum; instead, the CPF savings will be used for their CPF LIFE plan, providing them with a monthly payout until they pass on. This approach is an effective way for parents to ensure that the inheritance lasts for their children.
Additionally, CPF SA currently attracts more than 4% interest per year. In comparison, a 30-year or 50-year Singapore Government Bond yields around 2.9%. Given that the ‘guarantor’ is the same, which is the Singapore Government, CPF SA offers a higher return than what’s available in the market. This ensures that the ‘inheritance’ grows at a higher rate from a young age, accumulating a much larger retirement sum. For instance, if your child is 12 years old and you top up their CPF SA to $205,800, a 4% annual return would grow their CPF savings to $1,645,176 by age 65, at which point they can start receiving payouts through the CPF LIFE scheme.
Drawbacks of This Strategy
One key concern is that topping up your child’s CPF SA does not offer tax benefits. However, the focus here isn’t on tax optimization but on using CPF SA and CPF LIFE as a ‘trust’ to prevent wilful spending. Moreover, this strategy could save you significant costs compared to setting up a formal trust.
Another limitation is the cap on how much you can top up, restricted by the FRS amount. If you have a larger inheritance to leave, this might not fully address your needs. You could consider a private annuity and name your child as the beneficiary. However, your child could terminate a private annuity early and spend the money, which could defeat the purpose. Early termination of an annuity typically incurs penalties too.
Another opportunity to top up your child’s CPF comes when they turn 55. At that point, you can contribute to their CPF RA up to the Enhanced Retirement Sum (ERS) as part of your inheritance planning, assuming you have already secured your own retirement needs. For example, the FRS in 2024 is $205,800, while the ERS is $308,700. You can top up to this ERS limit if it hasn’t been reached yet.
Would You Adopt This Strategy?
Not all children are prudent with money; some are spendthrift and struggle to manage their finances. As parents, we aim to instill good financial values in our children, but not all lessons are learned. The next best option is to structure their inheritance in a way that provides them with regular small amounts rather than a lump sum that could be easily squandered. While a trust may be too costly for most, an interesting alternative is to use CPF as a means to hold funds intended for retirement and distributing them via CPF LIFE for your children—without incurring extra costs.
What do you think of this method? Are there other ways you can think of to ensure your children’s inheritance lasts a long time?