After talking with many friends and colleagues, I've come to a realisation that there are many people out there who for one reason or another have little to no knowledge of basic financial stuff like investing, high interest savings accounts, or even how to ask for a waiver of fees and charges.
And thus, a new segment is born!!! "How To Adult" will be weekly (hopefully) articles on basic knowledge that all adult Singaporeans should know of, and will be short and sweet so as not to bore everyone to sleep.
And what else to start the the ball rolling than the ubiquitous and somewhat mystifying thing called the CPF, otherwise known as the Central Provident Fund.
The CPF is officially billed as the national pension system, aka what you are meant to retire on. It is, however, slightly more complicated than that.
- If you are working for an organisation and your salary is above $500, a percentage of your salary will be deducted into your CPF accounts. Your employer will also be required to pay a certain percentage of your wages to the account as well. That rate is different by age groups and income, but as an example a person below 50 years old and earning more than $750 a month will see a 20% deduction from their pay, as well as an additional 17% contribution from the employer, for a total of 37%.
- The CPF is split into 3 accounts, Ordinary Account, Special Account, Medisave Account.
- Ordinary Account is where most of the contributions will go to. It earns 2.5% interest per annum (3.5% for the first $20,000 in it), and can be used for a variety of purposes, the most commonly used of which is to buy a property, whether HDB or private.
- Special Account is meant for pure retirement purposes, and earns 4% interest per annum (5% for the first $40,000). It can be used to buy a variety of investment/insurance products, however most who are knowledgeable in financial management agree that one should just leave the money in there given that the 4% is risk free and guaranteed.
- Medisave account earns 4% interest per annum, and is used for medical purposes, such as hospital visits, consultations and payment for Medishield Life, a national healthcare policy.
- As the national pension fund, there are two ways of getting your money out of CPF.
- At age 55, you can withdraw money from your combined Ordinary and Special account, calculated as either $5,000 or any amount that is above a ceiling that is decided by the government (currently $166,000), whichever is more. The leftover money will then be combined into a new Retirement Account, which earns 4% interest per annum (5% for the first $60,000, 6% for the first $30,000)
- The monies will then be used to buy an annuity plan known as CPF Life, which gives you a sum of money every month from the time you turn 65 years old till death. The money you receive each month will be proportionate to how much money was used to buy the annuity
- Other than the monthly contributions, you can voluntarily top up your CPF account with cash, either to take advantage of the guaranteed interest rates, or to reduce your taxable income.
Whew, this post went longer than expected, and it barely scratches the surface of the labyrinth of schemes and rates of the CPF. But I believe much of the basics have already been captured here, and should suffice to help you understand what CPF is about. For more information, perhaps Google, or go to www.cpf.gov.sg to read up more. Or if you feel particularly lazy, just write a comment below and I’ll get back to you ASAP.
