Park your spare cash with CPF to enjoy higher returns

Park your spare cash with CPF to enjoy higher returns

For retirees, the Central Provident Fund Board is a goldmine. Less well known is that savers, too, can use CPF like a bank to house their savings with peace of mind.

CPF is safe as houses, actually safer - given the number of fires a year in homes (2,898 last year, according to the Singapore Civil Defence Force.)

Singapore is one of the few countries, actually out of only nine, accorded the strongest credit rating of AAA by international credit rating agencies.

Critically, being safe does not mean measly interest rates on our CPF accounts - ordinary, special, Medisave and retirement. In fact, the interest rates are amazingly good, much higher than those offered by local and foreign banks.

The highest 12-month fixed deposit rates are still sub-2 per cent while the CPF interest rates range between 2.5 per cent and 6 per cent.

So, it makes a lot of sense to put as much money into our CPF accounts as allowed.

There are two ways to top up one's CPF accounts - voluntary contribution (VC) and, if you are at least 55, via the enhanced retirement sum scheme.

The voluntary contributions to all three CPF accounts that a CPF member can receive in a calendar year is currently $37,740. Many working people are not aware that they can top up their VCs if their mandatory contribution (from employer and employee) is less than the annual prescribed amount.

As the combined mandatory contribution - from employer and employee - drops dramatically from age 55 to 26 per cent from 37 per cent, and further when the CPF member is above 60 and above 65, the amount for VC cash top-up that one can make gets larger.

If you're not working or retired, you or your spouse can top up your CPF to the full VC amount.

If you have more savings after maximising this year's VC top-up and want to help your young adult children with buying their first property, or build up their savings, you can look into topping up their VC.

It's a pretty good way of parking savings. Not only does the CPF money earn superior returns, for retirees, they are not locked up, unlike banks' fixed deposits. Those who have reached 55 and who already have set aside their full retirement sum can withdraw their CPF funds in the ordinary and special accounts whenever they need to.

The enhanced retirement sum (ERS) scheme, which is currently $241,500, is another savings channel for 55-year-olds. With the ERS, those turning 55 this year can tap the CPF Life scheme to get $1,770 to $1,920 a month from age 65, as long as they live.

It was disclosed in Parliament last month that CPF members made 1,700 top-ups - worth $80 million - to their retirement accounts in January to boost their retirement savings beyond the full retirement sum.

This was the first month that the ERS scheme took effect, allowing people above age 55 to set aside a higher sum that will give them higher lifelong payouts under CPF Life.

CPF Life is an annuity scheme that gives members monthly payouts when they reach the eligible age, with the amount depending on how much money they have in their retirement account.

Again, it's not clear how many people know this but one can withdraw cash from the retirement account after the full retirement sum is set aside.

For withdrawal, the CPF member must own a property which has to be pledged to CPF.

So, if you have savings and intend to use it some time in the future - whether it's to fund your children's higher education, go on a world tour or buy another property - it's a good place to park your funds.

Parking savings in the retirement account, which pays the highest interest rate of as much as 6 per cent on the first $30,000, makes a lot of sense for those with no stomach for the roller-coaster stock market.

My 2015 statement showed that the total interest I earned came up to 3.3 per cent based on the total CPF amount as at Dec 31, with contributions going in at different times of the year. Buying saving or annuity products from insurance companies is not much better when returns are not guaranteed and after fees are factored in.

The best thing about the CPF? Talk to its knowledgeable staff and they will give you unbiased information on your savings.

The only niggling thought is how long can CPF go on paying these superior returns.

This article was first published on March 24, 2016.
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