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5 Compelling Reasons to Top-Up Your CPF Special Account (SA) for Long-Term Benefits

Did you know that Singapore’s pension system – Central Provident Fund (CPF) ranked in the top 10 according to the Mercer CFA Institute Global Pension Index?

In case you didn’t know, employers contribute up to 17% of our salary to our CPF accounts, while we contribute up to 20% of our salaries. The government provides a yearly base interest rate of 2.5% (on the Ordinary Account) to 4.0% (on the Special and MediSave Accounts) through the CPF system. We have the chance to further optimise our CPF savings, specifically in our Special Account (SA) allocated to retirement planning, by utilising the Retirement Sum Topping Up (RSTU) Scheme.

In this article, we will highlight five compelling reasons why topping up our CPF Special Account can provide long-term benefits and pave the way for a secure and comfortable retirement.

1. Guaranteed Capital and Returns

Topping up your CPF SA is almost entirely a risk-free investment. Unlike other investments, the Central Provident Fund offers guaranteed returns supported by the Singapore government, a triple-A-rated entity. This means that regardless of the state of the economy or investment landscape, we are guaranteed to receive returns on our CPF monies. We can have peace of mind knowing that our CPF monies and its returns are secure.

Consider topping up your CPF SA with surplus funds or year-end bonuses to maximise your returns. By leveraging the guarantee provided by the government, it helps to create a solid foundation for your retirement savings. 

As an example, Emily Tan decided to top up her CPF SA with her annual year-end bonus. By doing so, she is building a solid foundation for her retirement savings knowing that it is protected and would continue to grow over time.

2. Attractive Interest Returns

By topping up your CPF Special Account, you can earn a minimum return of 4.0% per annum—a remarkable rate considering the low-risk nature of CPF as mentioned in the first point. Additionally, the first $60,000 in your CPF accounts, including up to $20,000 from your Ordinary Account, earns an extra 1.0% interest. If you start early to maximise returns, you could potentially earn up to 5.0% interest on a larger CPF sum. 

CPF Interest Graph
Source: CPF Board

When comparing investment options, local bank deposits may not offer the most attractive returns. Savings accounts typically provide low interest rates, starting as low as 0.05% per annum. Even high-interest rate savings accounts such as the UOB One Account advertise returns over 7% per annum often come with conditions and requirements, resulting in actual returns of around 3.0% to 4.0% per annum. Fixed deposits offered by banks also hover around the 3.0% to 4.0% per annum mark. However, it’s important to consider the reinvestment risk associated with fixed deposits, as they have maturity periods ranging from several months to 2 to 3 years.

In comparison, CPF SA offers more appealing returns with lower risk. With a minimum return of 4.0% per annum, CPF SA provides a reliable and secure investment option. By choosing CPF SA, you can avoid the frustration of dealing with low returns and enjoy the benefits of steady and predictable growth for your savings.

Regularly assess your CPF savings and consider topping up your SA to take advantage of the attractive interest rates. Plan for the long term and aim to contribute consistently over time to maximise the potential returns. 

For example, you start topping up your CPF SA early in your career. By contributing regularly and taking advantage of the additional interest on the first $60,000, you can potentially accumulate a substantial retirement sum to provide you with financial security during your golden years. 

3. Maximizing your Tax Savings with CPF SA

One of the significant advantages of topping up your CPF SA is the opportunity for tax savings. Cash top-ups to your SA can qualify for tax reliefs of up to $8,000. By lowering your chargeable income, you may fall into a lower tax bracket and enjoy substantial tax savings. These savings, coupled with the returns earned, contribute significantly to building your retirement nest egg.

CPF SA Graph
Source: CPF Board

We all know it’s crucial to have a solid plan in place. Now, if your plan involves stashing money away in a boring savings account or playing it safe with conventional investments, we’re probably better off topping up our/and your loved one’s SA.

Before you do so, consult your financial advisor or tax professional to determine the optimal amount to top up your CPF SA based on your tax planning needs. This can help accelerate your retirement savings.

4. Forced Savings for Retirement Planning

Topping up your CPF SA is an excellent option in planning for retirement. In fact, CPF is an excellent pension system that the Singapore government came up with to force individuals to save up for their retirement. You will be surprised that many individuals in Singapore are not financially literate and do not plan for their retirement. 

Calculate your eventual CPF savings by contributing a certain amount each year or work backward from a target amount you aim to have by 65. Consider topping up your spouse’s SA to optimise household tax commitments, depending on their income. You can also explore other investment options for funds beyond your CPF Special Account.

However, do bear in mind that CPF SA is not an investment option and you should not use it as an investment tool. You should probably top up a decent fund into CPF SA and channel your funds to stocks/bonds or high-yield savings accounts.

It is best to set clear retirement goals and establish a contribution plan to ensure you are consistently saving for the future. Consider utilising the RSTU Scheme to top up your CPF Special Account and take advantage of the tax benefits and forced savings mechanism.

For example, a long-term couple, Mark and Linda planned for their retirement by topping up their CPF SAs and optimising their household tax commitments. They set aside a certain amount each year to ensure they would have a comfortable retirement, free from financial worries. 

5. Long-Term Financial Security

Your CPF monies are secure for retirement, even in challenging financial situations. CPF funds are protected from potential creditors, making it an ideal choice for entrepreneurs, freelancers, and those with high levels of debt. 

It is best to build an emergency fund to cover unexpected expenses or short-term financial needs. This ensures that your CPF SA remains untouched for its intended purpose—building a strong financial foundation for your retirement. 

My friend, Brian, is a financial advisor. He is considered to be self-employed and does not have CPF top ups from his employers. He prioritised his CPF contributions and maintained an emergency fund to establish long-term financial security for himself. 

However, keep in mind that cash top-ups to your SA are designated for retirement planning purposes only and cannot be used for other expense such as mortgage repayment and insurance. 

CPF Special Account (SA) is A One-Way Street

Once you’ve made the decision to top up your CPF SA, it’s important to understand that you’re committing to a long-term investment. That means the next time you’ll get your hands on this money is when you reach the golden age of 65 and start receiving those monthly payouts from CPF Life. But hey, don’t fret! This commitment is all about securing your financial future.

Now, here’s something to think about. While it’s great to prioritise retirement savings, we understand that life happens, and we may have other financial requirements along the way. Maybe you’re dreaming of a beautiful wedding, saving up for a home down payment, or even considering investments in a business venture or some well-deserved entertainment. And let’s not forget the importance of having the flexibility to navigate through unexpected challenges, like retrenchment or allowing one parent to stay at home after having a child.

But wait, there’s a silver lining! If you’ve been diligent with your money management and have additional savings beyond what you’ve set aside for your financial goals and emergency funds, then it’s worth considering topping up your CPF SA. By doing so, you’re taking that extra step towards securing a comfortable retirement while maintaining the flexibility to handle life’s exciting twists and turns.

Remember, it’s all about finding the right balance and making informed choices that align with your unique financial situation and aspirations.

Eugene Chai

With five years of financial experience (and maybe a few too many all-nighters fueled by cold brew and craft beer), Eugene tackles complex financial concepts and breaks them down for young adults. Featured on Investment sites and CNA's Money Talks, this self-proclaimed "Finance Whisperer" isn't your stuffy suit. He uses relatable narratives (think "adulting, but make it money") to turn numbers into your financial BFFs, guiding you towards smart choices with your hard-earned dough.

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