As announced at the Singapore Budget both last year and this year, there will be several changes to the way the CPF works. Most of these changes affect those who are at least 50 years old in 2016.
Here's a quick summary of all of the changes and what this means for your CPF account and your take home pay.
1. CPF Contribution Rate increases for those aged between 50 to 65 years old
Currently, for those of us 50 years old and below, CPF contribution rate is 37% of our salary (20% of your own salary + 17% employer contribution). This amount gets lower as we get older. From 1 Jan 2016, this contribution rate is extended to those aged 55 and below. Here are the new contribution rates and what they changed from:
2. Ordinary Wage Ceiling will be increased to $6,000
Currently, the CPF wage ceiling is $5,000. That means that both you and your employer will only need to make CPF contributions for the first $5,000 in salary. From 1 Jan 2016, that has been raised to $6,000.
We've already talked about what raising the CPF salary ceiling will mean for you, but in summary, that means from 1 Jan 2016, if you're 55 years old or younger and earning $6,000 or more each month, your take home pay will now be $200 less than before. In addition, your employer now has to contribute up to $170 more each month.
Let's look at the example of Ms Hazirah, who turns 54 in 2016. She earns $6,000 a month. In 2015, her total CPF contribution rate (employee and employer) would have been 35% of $5,000 (the 2015 wage ceiling), or $1,750 each month. In 2016, assuming she still earns the same salary, her CPF contribution rate is now 37% of $6,000 (the 2016 wage ceiling), or $2,100 each month.
That's an extra $350 going in to Ms Hazirah's CPF account each month. Of course, from 2016, Ms Hazirah's take home pay is also $250 less each month, due to the changes in contribution rate and wage ceiling.
3. Higher CPF interest rates for those aged 55 and above
If you're 55 years and above in 2016, you can expect to earn up to 6% interest on your CPF balances. But note that it's only for the first $30,000 of your CPF. The next $30,000 will earn the same 5% interest rate that everyone else is enjoying on their first $60,000. Finally, any CPF amount above $60,000 will only earn the base 4% interest rate, the standard interest rate.
The good news is that you'll now have more flexibility to top up your loved one's* CPF accounts in order to enjoy the higher interest rate. That means, if you have excess CPF above the Basic Retirement Sum, and your spouse** doesn't, you can top up their CPF accounts so that they can earn up to 6% interest.
That way you don't need to tell them you love them. They'll know.
Wow… these changes seem really complicated… Put simply, the government is trying to help you save for your retirement, especially for those of you aged 50 and above. I find their lack of faith disturbing.
To do this, they're increasing the contribution rates, which means your employer needs to pay more, and your take home pay may decrease if you're between 50 and 55 years old.
They're also raising the wage ceiling, which means your employer needs to pay more, and your take home pay WILL decrease, if you're earning more than $5,000. Finally, they're helping to grow your CPF by increasing the interest rates for the first $60,000 in your account, with an additional 1% if you're above 55.
It's a trap!
Actually, it depends on how you want to look at it. Do or do not, there is no try.
Some will focus on the big picture, and the fact that their CPF accounts will get to grow faster as they near retirement. Most will focus on the details, like the fact that their take home pay will be affected (even if it's just 1% of their wages) at a time when they believe every dollar counts.
This article first appeared in MoneySmart
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