Retirement 101 in Singapore Part 3 Will the new CPF Life Scheme work for me?
The CPF Advisory Panel that was appointed by the Ministry of Manpower in September 2014 finally concluded its study on the CPF Scheme and how it can be better utilised to meet the retirement needs of Singaporeans.
In part 2 of its recommendations released in Aug 2016 (Part 1 was released in Feb 2015), the panel further provided guidance on how the CPF Life scheme can be used to provide some inflation adjustments and to enhance the investment schemes to allow Singaporeans to better invest for the long term.
In this issue of the newsletter, we look at some of the key actionable recommendations made by the committee and how it will affect you and your retirement. We also discuss some of the merits and suitability of these recommendations and whether you should take up these recommendations.
Summary of the CPF Advisory Panel’s Major Recommendations:
- Allow members to have the option to defer their payout start age, up to age 70, for permanent higher monthly payouts. Members can increase their monthly payout by 6-7% per month for every year they defer their payout age. Whilst at first look it seems very attractive, one must not forget that by deferring the payout age by a year, the loss of income for the year would take about 15 years of the increased payout to be paid back. This means that without accounting for the loss of
purchasing power, the member would only be better off if he can survive beyond the age of 85 if he defers the payout to age 70. Hence, this option might be more suitable for those members who are still working post age 65 and has no need for the retirement income.
Otherwise it might make more sense to start the payout at age 65 instead.
- Allow members who desire higher payouts to top up their CPF LIFE premiums with their CPF savings or cash, subject to a cap. With the Enhanced Retirement Sum (ERS), members can contribute up to three times of their Basic Retirement Sum (BRS) at age 55 for their CPF Life. This allows them to increase the payout available at their prevailing payout age. Amongst all the recommendations, this is perhaps the best option available as it allows the members to enjoy a higher interest of 4% on their RA till age 65 when they choose their CPF Life plan. With the private annuity market currently unable to offer any annuities that are more attractive than the CPF Life, this should be the option for most members who have excess savings in their savings or CPF.
- Allow the option to withdraw up to 20% of Retirement Account Savings at the Payout Eligibility Age. For members who turn 55, they are now allowed to withdraw CPF balances above the CPF Minimum Sum. However, for those who did not meet the minimum sum, they could only withdraw up to $5,000. This option
hence allows those who reach 65 to withdraw up to 20% of the committed CPF minimum sum in their Retirement Account.
This option should probably be exercised only as a last resort when other short term needs are more urgent as the withdrawal would greatly impact the monthly payout that is available to the CPF member.
- An additional CPF LIFE plan should be offered with payouts that increase at a set percentage every year As it will be discussed in the next section, the newest CPF Life “Escalating” plan would offer a 2% increase in the payout every year while starting with a smaller initial payout. With the lower initial payouts, most of the advantages of the escalating payout has been negated, hence making this option less attractive.
However, the devil is in the details and without any information on the bequest potential of the plan, it might be wiser to wait till the scheme is officially launched before deciding if this option is suitable.
This option would be most suitable for members who already have a high retirement income in the initial years of retirement through their insurance policies and requires some inflation hedge in their retirement income. Otherwise the likely lower yield associated with an increasing payout is unlikely to be attractive to most members.
- Providing a small number of well-diversified Lifetime Retirement Investment Scheme funds, which are simpler for CPF members to choose from. The Lifetime Retirement Investment Scheme funds are going to be designed to be suitable for those members who are up to the challenge of investing for long term potential goals and without the need for capital guarantees. It will also be designed to be kept simple so that members would not be overwhelmed by the difficulties associated with investments. Whilst investments are potentially able to yield better returns than remaining vested in the CPF accounts, it
might still not be advisable for members to invest their Special Accounts or Retirement Accounts savings as the risk free rate of 4-6% are superior to most investments in such investment climates. With a lower hurdle rate of 2.5% for the CPF Ordinary Accounts, it might make more sense for younger members to invest and potentially accumulate more for retirement. For members nearing retirement, they might not have the time horizon needed for investments and might be better off capitalising on the higher interest rates that they can receive in their Retirement Account once they turn 55.
An additional CPF Life option
When the CPF Life option was first introduced in 2009, there were 4 schemes for members to choose from. After extensive feedback, this was reduced to 2 in 2013 to simplify decision-making for the members. Hence,
for most members turning 55 from 2013, they only had to make a choice between CPF Life Basic and CPF Life Standard.
As discussed in the previous issue of the newsletter, CPF Life Standard is
the default option for those who did not choose any option, as the CPF board might have rationalised that a higher monthly payout would be the
preferred option for members as CPF Life is intended to take care of their
personal needs at retirement. However, as we discussed in our talks
and in the newsletter, CPF Life Basic, despite its slightly lower payout monthly, might be a better option for most members as the difference in the bequest amount more than makes up for the lower monthly payout.
As can be seen for the comparison to follow, the difference in the bequest amounts for CPF Life Basic and CPF Life Standard can be quite substantial.
This option also comes with trade-offs. The trade-off of having increasing payouts is that the initial payout would be lower than that of the 2 current CPF Life schemes. Although no exact figures have been released yet, based on the scenarios given by the committee, we have worked out the various payouts under each CPF Life schemes.
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