Recently, a relative of mine approached me for advice on his CPF Retirement Account (‘RA’). He is in a privileged position as he had the Full Retirement Sum (‘FRS’) transferred to his RA when he turned 55. He is now exploring the option of topping up his RA to the maximum allowable limit of Enhanced Retirement Sum (‘ERS’), being $279,000 in Year 2021. However, he is confused whether it is better to use cash or CPF to top up to his RA to reach ERS and receive higher CPF LIFE payouts in the future. For those on the CPF LIFE scheme and with sufficient retirement funds, this is not a simple problem to grapple with, albeit a happy one. Therefore, I thought it might be useful to flesh out this conundrum with more details in a blog post. Finally, given his circumstances, I eventually “advised” him to use cash to top up his RA to ERS based on a decision tree framework that I developed.
Decision Tree Making Process
As the issue at hand is complex, I have decided to approach the decision-making process via a decision tree framework as shown in Diagram 1.
The decision tree sets out 2 questions to be answered:
1) Have Your Spouse Reached FRS?
If you have a spouse whose CPF balances have not reached FRS yet, it is usually recommended that you can help your spouse catch up to achieve FRS first. That is especially the case if your spouse has been a homemaker taking care of the household. There is no better way to show your appreciation of the invaluable work he/she has put in by transferring your CPF funds into his/her Special Account (‘SA’) or RA. My relative did exactly that and I really commend him for that.
Besides showing your affection, topping up your spouse’s CPF balances also acts as a form of risk diversification since it is more prudent for 2 members in the household to have sufficient levels of retirement payouts for life. Depending on the type of plan (Basic, Standard or Escalating) chosen by the spouse with higher CPF balances, his/her spouse may end up with insufficient retirement funds in the unfortunate event of the spouse’s passing. In addition, consider the case whereby one spouse is on ERS but the other does not even meet the Basic Retirement Sum (‘BRS’) – I would think that such inequality does not bode well for the long-term harmony of a marriage.
Once both you and your spouse’s RA have reached FRS, this brings us to the next question in the decision tree.
2) Does Your Cash Yield More Than 4%?
Why have I set 4% as the benchmark? Well, this is the interest rate offered by CPF for your funds in the CPF SA. Hence this is the opportunity cost involved in this situation. If your idle cash is unable to yield more than 4%, you may be better off using cash to TOP UP your RA to reach ERS. Given the low interest-rate environment that we are currently in, it may not be surprising if you find this the case. Again, I must emphasize that this refers to spare cash.
Alternatively, if you are confident that your idle cash can generate returns of more than 4%, you may be better off transferring funds from your SA or Ordinary Account (‘OA’) into your RA to reach ERS instead. For your information, in the instance of performing a CPF transfer, SA savings will be prioritised first followed by OA savings.
Unfortunately, it is no longer possible to achieve more than 4% guaranteed returns via savings accounts or even high-yield insurance savings accounts such as Dash EasyEarn. There is a need to explore products at the higher end of the risk spectrum but do consider whether it is still worthwhile to be taking high risks during one’s golden years?
With the decision tree, I hope it helps you decide which source of funds to use to top up your RA to reach ERS for eventual higher CPF LIFE payouts. At least, it helps in my relative’s case as he has decided to make a cash top-up to his RA.
Pros of Topping Up RA to ERS
When one reaches the age of 55, the RA will be created. In the absence of a property pledge, the default option is that the CPF Board will transfer an amount equivalent to the prevailing FRS from the SA to the RA to form your retirement sum. This is the case even if you have funds higher than the FRS sitting within your CPF. My opinion is that this default option of doing nothing is a case of leaving some money on the table. Here are the reasons why:
1. Higher streams of monthly income upon age 65
The main reason why we top up our RA to reach ERS level is to enjoy higher monthly lifelong CPF LIFE payouts when we eventually commence withdrawals upon reaching payout eligibility age. Whether it is a CASH top-up or a CPF transfer, the 4% interest will start compounding and contribute towards as premiums to the CPF LIFE pool.
A common misconception is that one must top up to the applicable ERS level at one go. Well, it is actually possible to top up one’s RA to any amount (as long as it does not exceed ERS) and at any time of the year. Therefore, for those who are saving up to reach ERS, you should immediately top up whatever amount that you have already set aside to allow compound interest to work its magic earlier.
In fact, as the ERS increases annually to catch up with Singapore’s inflation, you can continue to perform annual top-ups as the top-up limits does not take into consideration the interest earned in your RA. For instance, the ERS increased from $271,500 in Yr 2020 to $279,000 in Yr 2021. That allows for an additional $7,500 of top-ups. It is best that you log in online to your CPF account via your Singpass to find out the precise amount that you are eligible to top up to your RA. Go to CPF Online Services – > My Messages to find out more.
2. Quality/Credit-worthiness of the additional income
Another commonly overlooked factor is the “quality/credit worthiness” of the additional lifelong income that you are getting from CPF LIFE. It provides a reliable income stream that is less affected by the performance of the economic markets. The alternative would be to take your cash withdrawn from either your bank accounts or OA/SA and purchase investment products that are subject to the vagaries of the markets. The reliability of CPF LIFE should not be underestimated especially when most of us would be dependent on the payouts to finance our retirement expenses.
3. Cash top-up is not part of CPF Annual Limit
A cash top-up to the RA falls under the Retirement Sum Topping-up Scheme (‘RSTU’). Therefore, it does not form part of the CPF Annual Limit (which is the maximum amount of CPF contributions that can be credited to an individual’s account in a year and currently stands at $37,740. Differences between the RSTU scheme and VC scheme can be found in this FAQ.
However, I must stress that this cash top up is not eligible for tax relief if one’s RA already exceeds the prevailing FRS.
Cons of Topping up RA to ERS
1. Irreversible Move
When you top up your RA to ERS, this is considered as an irreversible move. This signals your willingness to participate and extract more benefits from the CPF LIFE scheme beyond the default option.
If you have used cash to top up your RA, you suffer an immediate loss of liquidity as they get locked up in the RA until payout eligibility age. Similarly, if you have used funds in your OA or SA to perform the RA top-up, you lose your ability to withdraw them. (Learn more about how much money you can withdraw from your CPF at 55 in this article)
As I have emphasized earlier, the issue of using either cash or cpf to top up one’s retirement account is a rare but happy problem.
This article is published on 24 January 2021