When you start reading about CPF, you know you’ve officially #adulting. And you know what? You should be informed about the CPF scheme! Knowing how the CPF works and what it does will help you make informed decisions and keep you financially savvy. If you’re a little confused as to how it works, not to worry! This read is just for you.
1) Both you and your employer contribute to your CPF
Each month, 20% of your salary goes into your CPF. On the other hand, your employer contributes 17% to your CPF. This means that each month, you save 37% of your salary! This amount in your CPF isn’t just for retirement — you can also use it to pay for housing, education, healthcare, and also investments.
2) The CPF is divided into 3 different accounts
The 3 accounts which make up your CPF are the Ordinary Account, Special Account, and Medisave Account. So how do these accounts differ?
The Ordinary Account
- Used for housing, insurance, investment and education.
- Pays out a base interest rate of 2.5 % per annum
- Specifically set aside for retirement
- Pays up to 5% interest per annum
- After you turn 55, money from your OA and SA will be transferred here
- Gives you monthly payouts when you turn 65 years old.
3) 23% of your income goes to your OA
If you’re below 35, 23% of your income is channelled into the OA. With the OA, you can use it to buy your flat, pay for education and invest. If you’re thinking of using this sum for investment, make sure your returns are higher than the rates you can earn with CPF. CPF rates are pretty stable, unlike investments!
Here are some assets you can invest in:
- Shares and loan stocks
- Unit trusts
- Government bonds
- Statutory board bonds
- Bank deposits
- Fund management accounts
- Endowment insurance policies
- Investment-linked insurance policies (ILPs)
- Exchange traded funds (ETFs)
That being said, it doesn’t mean you can invest everything you have in your OA and SA. For your OA, you can invest any amount in excess of $20 000, while in the SA, you can invest any amount in excess of $40 000. This ensures that you have an untouchable amount that’s set aside for your retirement.
4) CPF LIFE
Under the CPF LIFE Scheme, you can choose between 3 different plans for your retirement payouts when you turn 65. The Basic Retirement Sum (BRS), Full Retirement Sum (FRS), and Enhanced Retirement Sum (ERS). Since the amount you have in your CPF is different for everyone, the different schemes in CPF LIFE are designed to suit each person’s needs.
The FRS is capped at $171 000. You can choose to have monthly payouts under the FRS or BRS, which is half the amount ($85 500). Alternatively, you can also opt for the ERS which is 1.5 times the amount ($256 500).
5) Medisave Account
Every month, a portion of your CPF contribution is channeled to your Medisave Account. Out of the 37% of your total income contributed, 8% is set aside for your healthcare needs. When you reach 51 years old, the percentage reaches 10.5%
In the Medisave Account, you’ll also earn a base interest rate of 4% per annum. If your combined CPF balance is at least $60 000, you’ll also get an additional 1% per annum!
The CPF scheme can be difficult to understand at first, and there are still other finer details especially in the CPF LIFE scheme. But if your knowledge of CPF starts from 0, having an overview of how your retirement scheme works is a great place to start! Having an idea of the different accounts in your CPF and the interest rates they earn will help you make financially savvy decisions for yourself.