It is wrong to simply assume that the return on Central Provident Fund (CPF) money is just 2.5 per cent for the Ordinary Account, and 4 per cent for the Medisave and Special accounts.
We have to remember that CPF contributions are tax-free.
Take the case of a person earning $3,000 who contributes $600 to his CPF account, while his employer contributes $480.
If there were no CPF scheme, this person would have received $3,480 in cash. So in a year, his taxable income would be $41,760, and he would have to pay more than $600 in income tax, assuming no relief other than earned income relief.
With the CPF scheme in place, his monthly net income is just $2,400, and his income tax is slightly more than $150.
So he saves about $450 a year in income tax. When multiplied by 40 years of working life, his total tax savings would be about $18,000. On top of the tax savings, he enjoys at least 2.5 per cent compound interest for his CPF funds. Money withdrawn from CPF is tax-free as well.
The problem with the CPF scheme is not that the returns are low. In fact, many people cannot achieve consistent 4 per cent returns for their savings and investments.
The problem is that the money is locked in for several decades. We cannot utilise it when we are in dire straits.
If the Government allows us to withdraw a portion to cope with a prolonged period of unemployment or other personal crises, that would be good.
Hoe Siew Cheng (Ms)
This article was first published on June 04, 2014.
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