Breaking news.
Just today Deputy Prime Minister Lawrence Wong announced a whole slew of initiatives at Budget 2024.
You can check out our summary of Budget 2024 here:
As personal finance nerds, we can’t help but zero in on the latest seismic change to the Central Provident Fund (CPF) system.
Here’s all you need to know.
TL;DR: Latest CPF Changes Announced at Budget 2024 & How it Will Affect CPF SA Shielding
What Are the CPF Changes Announced at Budget 2024?
At Budget 2024, Minister Wong announced these significant changes to CPF:
- In 2025, individuals aged 55 to 65 will see an additional 1.5% increase in their CPF contribution rates
- From 2025, the CPF Enhanced Retirement Sum (ERS) will be raised to quadruple the Basic Retirement Sum (BRS), setting the ERS at $426,000.
- From 2025, the CPF Special Account (SA) for those aged 55 and above will be closed:
- The CPF SA funds will then be channelled to the Retirement Account (RA) to fulfil the Full Retirement Sum (FRS).
- Any remaining funds in the CPF SA will be moved to the CPF Ordinary Account (OA).
What it Means for Singaporeans
For context, monies held in the CPF OA accrue interest at a rate of 2.5% per annum (p.a.), whereas the CPF RA and SA benefit from an approximate interest rate of 4% p.a.
However, upon reaching the age of 55, CPF members have the option to withdraw specific amounts from their Special Account as outlined below:
| How Much Savings Do You Have In OA & SA? | How Much Can You Withdraw? | |
|---|---|---|
| With Property Pledge | Without Property Pledge | |
| $5,000 or less | Everything from SA & OA | |
| Between $5,000 and the Full Retirement Sum (FRS) | $5,000 and any RA savings above the Basic Retirement Sum (BRS) | $5,000 |
| More than FRS | $5,000 or excess savings from SA and OA above FRS, whichever is higher, and any RA savings above the BRS | $5,000 or excess savings from SA and OA above FRS, whichever is higher |
| Note: The excess money that can be withdrawn excludes top-up monies, interest earned, and any government grants received | ||
This is why people in Singapore perform this CPF SA shielding hack.
What is CPF SA Shielding
For the uninitiated, your CPF RA and SA both yield a commendable 4.08% p.a., virtually risk-free. In contrast, the OA only generates only 2.5% p.a.
Therefore, a financially savvy individual would aim to optimize their CPF interest earnings by primarily using funds from their OA, which has a lower interest rate, to constitute their RA rather than their SA, as outlined below:
Pro-tip: It’s also important to remember that after reaching the age of 55, you can no longer transfer funds from your OA to your SA.
The aim is to have more of your CPF money earning 4.08% p.a. rather than 2.5% p.a.
This strategy involves withdrawing funds from your CPF SA for investments, aiming to minimize the SA balance just before turning 55. By reducing your SA funds, more of your CPF OA will be used to establish your CPF RA.
Nevertheless, it’s not possible to deplete your CPF SA entirely for investments. A minimum of $40,000 must remain in your SA, as the initial $40,000 cannot be invested under the CPF Investment Scheme (CPFIS). Likewise, the first S$20,000 in your CPF OA is also ineligible for investment.
This restriction of not using the first $40,000 from your SA for investments implies that your CPF RA could be fully funded with your SA savings, provided they are adequate for meeting your Full Retirement Sum (FRS).
The remaining balance in your CPF OA will ultimately depend on the amount withdrawn from your SA for investments and the initial balance in your OA.
Unfortunately, with the latest changes announced at Budget 2024 :
- From 2025, the CPF Special Account (SA) for those aged 55 and above will be closed:
- The CPF SA funds will then be channelled to the Retirement Account (RA) to fulfil the Full Retirement Sum (FRS).
- Any remaining funds in the CPF SA will be moved to the CPF Ordinary Account (OA).
- From 2025, the CPF Enhanced Retirement Sum (ERS) will be raised to quadruple the Basic Retirement Sum (BRS), setting the ERS at $426,000.
The CPF shielding hack will no longer be relevant from 2025 as the SA account will be closed.
The Ministry of Finance explained that:
As a principle, only savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate.
For now, questions remain. It is likely that when you are nearing age 55, you will not be able to invest the monies in your CPF SA.
As the story is still developing, we will update it when more details are released by CPF, so keep a close watch on the article as we will update it if there are any new developments.