By Soh Chin Heng
Mr Soh Chin Heng, or CH as he is commonly called by friends, is the Deputy Chief Executive (Services) of the Central Provident Fund Board Singapore. He is a non-practising certified financial planner, and gives regular talks on CPF and financial security.
When I first started working, I pondered over the issue of giving an allowance to my dad. I came across the CPF Retirement Sum Topping-Up Scheme (RSTU) and thought, "What a great deal! It allowed me to top up my dad's Retirement Account, conveniently credits an amount every month to his bank account, and earns attractive and risk-free interest. Moreover, I get a tax relief on my top-up." Almost without fail, I have been topping up for my dad over the past 20 odd years. He has now built up a substantial balance in his CPF, and has joined CPF LIFE.
After working for a few years, I was able to build up some savings in my CPF Ordinary Account (OA). I contemplated transferring my OA savings to my Special Account (SA), to earn higher interest. I went to the CPF website and commenced the transaction, but froze when the pop-up message reminded me that the transaction would be irrevocable. That held me back from doing the transfer for a few years, as I agonised between earning the higher interest rate by transferring, or keeping the money in the OA so that I can purchase a bigger or second property in future.
What settled the matter eventually was a pragmatic approach to transfer only a small amount, an amount that I would not regret even if I change my mind subsequently. And the act of doing the first transfer actually encouraged me to make a second, and subsequently, more transfers.
When my kids were four and six years old, I taught them the Rule of 72. It was magical to them that a dollar could become two dollars after 18 years, at an interest rate of 4% p.a. For good measure, I topped up their SAs and showed them how their CPF grew as they grow up. They have learnt the lesson well.
Besides the RSTU, there are other ways you can maximise the benefits of CPF. Here's the take of my colleague Daphne Wee, Assistant Director (Retirement Management Office):
"Step 1: Make voluntary contributions to your Medisave Account (MA)
Let's assume you work consistently and have low usage of your MA. The allocation of your CPF contributions to your MA is higher than the SA, which means it fills up faster. At some point in your career, you may not be able to contribute voluntarily to your MA as you may have met the CPF annual limit (the maximum you can contribute to your CPF through work or voluntarily), or Basic Healthcare Sum (the maximum you can have in your MA). So top up your MA first – earn interest rates of up to 5%* p.a and enjoy tax relief too!
Step 2: RSTU to SA
Top up your SA in cash for attractive interest of up to 5%* p.a and enjoy tax relief of up to $7,000 a year. As you continue to work, you may eventually reach the Full Retirement Sum at some point and cannot make further top-ups then.
Step 3: Use less OA for housing
You can consider paying your housing instalments in part-cash, part-CPF (or even fully in cash) to accumulate more savings in your OA, especially if you are servicing a bank loan and the loan interest rate is lower than the OA interest rate of 2.5% p.a.
Step 4: Refund your CPF used for housing in cash
Even if you have not sold your house, you can refund your CPF used for housing in cash. This will help you to build your OA savings further, and these savings can still be used towards future housing payments if you require them."
Sounds pretty sensible to me.
*Inclusive of an extra 1% interest paid on the first $60,000 of a member's combined balances, of which up to $20,000 comes from the OA.
This article is part of a series by Mr Soh, who will be sharing tips on how you can chart your way towards financial security. Read more:
The Most Important Financial Question
Your Financial Security Compass
Your Lifetime Financial Partner
Albert Einstein and Warren Buffet
If you're interested to find out how your CPF gives you a head start in saving for your future and discover other ways to put your money to work, do join us at our upcoming talk "Maximising Your Money" on 22 October!
Our speakers, Mr Soh Chin Heng, (Deputy CEO of CPF Board), Mr Christopher Tan (CEO of Providend) and Mr Loo Cheng Chuan (CPF Member), will also share some little-known tips on how you can reach your financial goals faster.
The session will end with a panel discussion moderated by Ms Lorna Tan (Invest Editor of The Sunday Times). Seats are available on a first come, first served basis. Register now to avoid disappointment!
Venue: Suntec International Convention & Exhibition Centre
Date: 22 Oct 2017 (Sunday)
Time: 3.30 – 6pm
To register, click here.