Change is afoot at the Central Provident Fund (CPF) scheme with the two new options announced on Wednesday.
While the new options may take two years or more before they are available, other CPF enhancements - announced early last year by the CPF Advisory Panel - have already kicked in.
They include different payout options to give us more choice as well as the flexibility of deferring payouts up to age 70 so as to receive more cash later.
The Sunday Times highlights the two new options and provides a guide for you to plan ahead for your CPF Life payouts.
CPF Life plan with escalating payout option
The two CPF Life plans - Standard and Basic - pay fixed monthly amounts for life.
The new escalating option is provided to address the concerns of some members about the rising cost of living.
HOW IT WORKS
The recommendation is for payouts to increase at a rate of 2 per cent per year to cope with inflation. However, those opting for this plan will start with payouts that are about 20 per cent lower compared with the current level plans.
Let's assume that CPF member Henry Tan (not his real name) has set aside the Full Retirement Sum of $161,000 at age 55 in his Retirement Account. When he reaches his payout eligibility age of 65, his Retirement Account would have grown to $243,900 because of the interest received from CPF.
Under the CPF Life Standard plan, he can expect monthly payouts of $1,320 when he turns 65 for as long as he lives. If he opts for the escalating option, he gets just $1,020 at the start but the payouts will increase at 2 per cent annually.
It may take Mr Tan about 25 years for his cumulative payouts from the escalating option to catch up with the payouts from the alternative fixed-amounts option, after which the escalating option would outperform.
At age 78, Mr Tan's monthly payout will be $1,330, exceeding that of the Standard Plan. And when he is 87, his monthly payout would have increased to about $1,580.
Those who want higher initial payouts under the new escalating option can either top up their CPF Life premiums or delay the payout start age up to age 70. The escalating option is not available for the Basic Plan.
WHAT DO EXPERTS SAY?
Finance experts say members should decide based on which payout structure best suits their retirement needs.
For those who may be concerned about increases in the cost of living as they grow older, the escalating option could be attractive, notes Mr Colin Pakshong, CPF Advisory Panel member and actuarial consultant.
One in three CPF members aged 65 are expected to live beyond the age of 90, and more will do so as life expectancies keep rising.
Mr Pakshong says: "If you have other sources of income in the initial years, perhaps through part-time work, savings or family support, deferring your payouts to enjoy the benefit of inflation protection may be a good idea."
He adds that members can think of the deferral or top-up as what they need in order to "buy" inflation protection.
"For others who may not be able to top up their accounts or defer their payouts, they must decide if the lower initial payments will mean their retirement income is too low for their needs. If so, the escalating annuity may not be a viable option for them."
Members should also keep in mind that whatever option they choose, their beneficiaries will always get back the remainder of principal amount of money that was put in. "Anything that has not been paid out as retirement income will be paid out to beneficiaries on the passing of a member," says Mr Pakshong.
Lifetime Retirement Investment Scheme (LRIS)
CPF members who want to invest their retirement savings can do so via the CPF Investment Scheme (CPFIS).
The LRIS is an alternative, simplified investment option which will offer a small number of low-fee, well-diversified and passively managed funds. It is targeted at members who do not have the financial expertise and/or time to select and monitor their investments.
HOW IT WORKS
The CPF Advisory Panel has recommended that the funds be professionally managed, with its net return to investors enhanced by low or zero sales charges and low fees, taking advantage of economies of scale from pooling members' investments, says Mr Pakshong.
WHAT DO EXPERTS SAY?
Mr Brandon Lam, head of retail financial planning, consumer banking group at DBS Bank Singapore, says the LRIS is ideal for those who have a long-term investment horizon and who do not want their investment returns to be eroded by fees and charges over time.
However, it is important to note that investment returns are subject to the performance of the underlying fund.
CPF Advisory Panel member and Providend chief executive Christopher Tan notes that there is no need to invest your CPF savings if you are content with the current annual returns of your CPF accounts.
Another scenario is where you may already have investments funded by cash, and treat your CPF, especially your Special Account savings, like the bond allocation of your overall portfolio.
Members who want or need higher returns for their CPF savings and are prepared to take a higher risk have two options - CPFIS, for savvier investors, and the LRIS.
Mr Pakshong warns that members should remember that the LRIS approach still involves a risk-reward balance.
"There is a risk that actual returns could be lower than those provided on the Ordinary and Special Accounts. Members need to be prepared to accept the risk of this happening if they invest in the LRIS. Otherwise, they can choose to leave their monies in their CPF accounts to earn the current interest rates."
Guide to CPF options for retirement
IF YOU HAVE JUST STARTED WORK
It is prudent to plan early for retirement. Ms Chung Shaw Bee, UOB's head of wealth management, regional and Singapore, says: "Doing so will reap benefits from the compounding effect of time. Having a long-term horizon can help to smooth out the impact of volatility on investment holdings," she says.
HOW TO GROW YOUR CPF SAVINGS
•Transfer your savings from the Ordinary Account to the Special Account to enjoy higher interest. Money can be moved from an Ordinary Account to the Special Account so long as the total amount in the Special Account does not exceed the prevailing Standard Retirement Sum of $161,000. This will enable you to grow your nest egg very quickly, simply by relying on the power of compounding. However, bear in mind that the money will be locked up in the Special Account as it is meant for your retirement. So do so only if you foresee that you will not need the funds in the short term. The Ordinary Account offers a guaranteed annual interest rate of 2.5 per cent while savings in the Special Account attracts 4 per cent. The first $20,000 of Ordinary Account balances, and $40,000 of Special Account balances, earn 1 percentage point more. As of January this year, members aged 55 and older are earning up to 6 per cent for the first $30,000 in their Retirement Account.
•Invest in the LRIS. When it is made available in the coming years, the LRIS will be a simple and low-fee option for members who want to invest to potentially earn relatively higher returns but, do not have the expertise or the time to do so.
•Consider the CPFIS. This will be suitable for savvier members who wish to actively manage their investments.
IF YOU ARE TURNING 55...
•Set aside Retirement Sum. At age 55, you will have to decide on the CPF Life payouts you need at your eligibility age and set aside the appropriate Retirement Sum in your Retirement Account.
•Top up your spouse's CPF account. After setting aside your Basic Retirement Sum, which is $80,500, you can consider transferring your CPF to your spouse's CPF so that he/she can also enjoy monthly payouts for life.
•Top up your own CPF account. You may want to top up to the Enhanced Retirement Sum, which is $241,500 presently.
IF YOU ARE TURNING 65...
•Choose your CPF Life plan from age 65. You may choose from the Standard (higher monthly payouts, lower bequest) or Basic plans (lower monthly payouts, higher bequest), or the new CPF Life plan with escalating payouts, once it is available.
•Choose to start payouts later. You can opt to defer payouts up to age 70. For each year that you defer, your starting payout increases by up to 7 per cent.
•Opt to withdraw 20 per cent of your savings. The 20 per cent includes the $5,000 sum that you could withdraw at age 55. This helps you to meet any urgent needs after age 65. But it means that your monthly payout quantum will be permanently reduced.
This article was first published on August 7, 2016.
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