CPF Special Account (SA) Shielding: How you can perform this retirement 'cheat code'

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If you’re living in Singapore, the planning of your finances and your retirement cannot exclude your CPF. From the day you start working, you’ll be contributing to your CPF Ordinary Account (OA), CPF Special Account (SA) and your MediSave Account (MA).

With all that money set aside over the years, you’ll have to start making plans to capitalise on your CPF savings when retirement comes knocking. 

But in this article, let’s zoom in on one plan-making in particular – a retirement ‘cheat code’, if you will – CPF SA Shielding. It is a term originally coined from this article back in 2019, highlighting how one can maximise your CPF accounts for retirement. 

Here’s a guide for you pre-retirees, or for the young adults helping their parents manage their finances. We’ll touch on what the CPF SA Shielding hack is, why people do it and how you can effectively execute it. 

How your CPF Retirement Account is formed 

To understand CPF SA Shielding, you first have to understand the CPF Retirement Account (RA). 

As its name suggests, your CPF RA is meant for your retirement, where your retirement sum will provide you with monthly payouts during your golden years. 

When you turn 55 years old, your CPF RA will automatically be created for you by pooling the savings in your CPF SA, followed by the money in your CPF OA, up to the Full Retirement Sum (FRS) which is currently $186,000. This order of funding your CPF RA cannot be changed. 

ALSO READ: I started planning for my retirement at 25: Here's how I did it

What is CPF SA Shielding, and why people do it

Both your CPF RA and CPF SA earn a respectable four per cent interest per annum, risk-free. However, the money in your CPF OA earns just 2.5 per cent p.a. 

Hence, someone financially savvy would try to maximise the interest earned in their CPF accounts, by having their CPF RA formed largely by CPF OA (which earns lower interest) rather than CPF SA. Do also keep in mind that you cannot make transfers from your CPF OA to your CPF SA after you turn 55. 

The aim is to have more of your CPF money earning four per cent p.a., rather than 2.5 per cent p.a. 

This is done by taking out the money in your CPF RA to invest, in order to keep the balance in your CPF SA to a minimum just before 55 years old. The less money you have in your CPF SA account, the more money is taken from your CPF OA to form your CPF RA. 

ALSO READ: CPF Shielding Hacks (Special Account & Ordinary Account): Do they really make sense?

However, you can’t completely empty your CPF SA. You will need to leave $40,000 in your CPF SA, because the first $40,000 from your CPF SA cannot be used for investments under the CPF Investment Scheme (CPFIS). Similarly, you are also not allowed to use the first $20,000 in your CPF OA for investments. 

How much you’ll have left in your CPF OA would ultimately depend on how much money you have in the account to begin with. 

How to execute CPF SA Shielding 

Before you turn 55 years old: 

  • Step one: Calculate how much you need to transfer out of your CPF SA, in order to keep just $40,000 in the account
  • Step two: Transfer that amount of money out of your CPF SA by investing the money in a low risk investment product (more on this in the section below)

Note, you’ll need to be able to invest under the CPFIS before you can do this.

After you turn 55 years old:

  • Step three: Wait and check for your CPF RA to be formed
  • Step four: Cash out by selling your investments
  • Step five: Transfer the money back into your CPF SA 
  • Step six (optional): Consider topping up your CPF RA up to the Enhanced Retirement Sum (ERS) to enjoy higher monthly payouts during your retirement 

Where should you put your CPF SA money in the interim? 

Let’s zoom in on Step two, where you have to transfer your CPF SA money out of the account by making investments. 

Under the CPFIS, you can use your CPF SA to invest in these products

  • Unit Trusts (less high risk products)
  • Investment-linked Insurance Products (ILPs) (less high risk products)
  • Annuities
  • Endowment policies
  • Singapore Government Bonds
  • Treasury Bills

As this money is meant for your retirement, and also because you’re only going to keep it in the investment vehicle for a short period of time, your investment of choice should incur low risk and low cost while offering high liquidity and stability. 

With that in mind, annuities, endowment policies, ILPs and Singapore Government Bonds are taken out of the equation, because they are less liquid and require time in order for your investments to see returns. 

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That leaves you with unit trusts and Treasury bills (T-bills)

If you’re considering T-bills, go for the ones with a six month maturity date.

You should also ensure that these bills mature after you turn 55, in order for your investments to reward you with a return before you transfer them back into your CPF SA.

If you’re considering unit trusts, here’s the full list provided by CPF.

To help you narrow down your search, look out for unit trusts with low to medium risk. Unsurprisingly, you’ll find that the options provided are the bond (fixed income) funds, such as: 

  • Eastspring Investments Unit Trusts – Singapore Select Bond Fund Class A (Expense ratio: 0.62 per cent)
  • LionGlobal Short Duration Bond Fund Class A (SGD) (Dist) (Expense ratio: 0.59 per cent)
  • Nikko AM Shenton Short Term Bond Funds (Expense ratio: 0.4 per cent)
  • Schroder Singapore Fixed Income Fund Class A (Expense ratio: 0.69 per cent)
  • United SGD Fund – Class A (ACC) SGD (Expense ratio: 0.67 per cent)

You’ll find that Nikko AM Shenton Short Term Bond Fund has the lowest expense ratio. It was also the bond fund referred to in this article

FSMOne, a platform that offers investment products and services, also recommends the Nikko AM Shenton Short Term Bond Fund as a Parking Facility Fund for CPF investment, investing in a diversified portfolio of quality, short-term bonds and money market instruments.

There’s also no sales charge incurred, although it is subject to the 0.05 per cent quarterly platform fee.

How much more do you stand to gain with CPF SA Shielding?

This all sounds great, but how much do you really stand to ‘gain’ with all this effort to shield your CPF SA? 

Here’s an example of what your CPF accounts would look like, both with and without executing the CPF SA shielding, based on the following assumptions: 

  • You have $200,000 in your CPF SA
  • You have $200,000 in your CPF OA
  • You are turning 55 years old this year and hence, the current FRS is $186,000

Example 1: With CPF SA Shielding done

Action Money involved
To shield CPF SA  Invest $160,000 into a short term bond fund, leaving $40,000 in your CPF SA 
Your CPF RA is formed using: – $40,000 from CPF SA– $146,000 from CPF OA Total = $186,000 (FRS in 2021)
Total amount of money in CPF earning 4 per cent p.a. (CPF SA + CPF RA) – $160,000 (once you transfer the money you took out to invest back into your CPF SA)– $186,000 in your RA Total = $346,000 
Total amount of money in CPF OA earning 2.5 per cent p.a. $54,000

Example 2: Without CPF SA Shielding done

Action Money involved
No CPF SA shielding done Full $200,000 kept in the CPF SA account
Your CPF RA is formed using: – $160,000 from CPF SA (leaving $40,000 in the account)– $26,000 from CPF OA Total = $186,000 (FRS in 2021)
Total amount of money in CPF earning 4 per cent p.a. (CPF SA + CPF RA) – $40,000 in CPF SA– $186,000 in your RA Total = $226,000 
Total amount of money in CPF OA earning 2.5per cent p.a. $174,000

From the following calculations, you’ll see that although you have $400,000 in your CPF for both scenarios, an extra $120,000 is earning 4 per cent instead of 2.5 per cent p.a. in Example one. 

In a single year, the difference in interest would be an extra $1,800. With the money compounded over the years, this would grow to become a sizeable amount. 

ALSO READ: Here's what your CPF full retirement sum might look like when you're 55

Strive for a better retirement 

The aim of securing a comfortable retirement for ourselves lies at the heart of this ‘cheat code’. 

Regardless whether you choose to shield your CPF SA or not, you can still top up your CPF RA up to the ERS of $279,000, to enjoy higher monthly payouts during your retirement.

And in case you didn’t already know, topping up your CPF SA or RA (or that of your grandparents, parents, spouse or siblings) can also contribute to reducing your income tax! 

If you’re not yet near the retirement age, there’s still time for you to grow your pot of gold. Get started by putting your investments on autopilot with a robo-advisor, or create your own portfolio using a brokerage account. 

This article was first published in SingSaver.com.sg