https://www.straitstimes.com/business/invest/use-cpf-special-account-to-grow-money-faster-before-it-closes
2024-02-24
Tan Ooi Boon
The CPF Special Account (SA) will close in 2025 for those who are 55 or older but this does not mean it has become less important for retirement planning.
When the closure occurs, people with money in their SA will see the balance moved to their Retirement Account – if they have not met the Full Retirement Sum – or to their Ordinary Account (OA) if they have already met the sum.
Younger members, especially those in their 30s and 40s, should view the impending Central Provident Fund change, announced in Budget 2024, as a reminder to make better use of the SA.
The reason is simple – the SA enjoys a higher interest rate (4.08 per cent for the first quarter of 2024) than the 2.5 per cent in the OA because it is primarily a long-term savings plan that aims to let you have more money to join the CPF Life annuity scheme later.
If your SA balance is less than the prevailing Full Retirement Sum, which is $205,800 in 2024, you can enjoy annual tax relief of $8,000 by topping up that sum in cash to your SA.
But if you care more about earning the high interest, you can make bigger lump-sum deposits to the SA in cash or with funds in your OA, up to the Full Retirement Sum. Huge incentives await those who can do this as early as possible.
For instance, a 35-year-old member who can accumulate $205,800 in his SA in 2024 will see the balance grow to over $450,000 at 55. The final sum will be a lot more because this amount does not include the salary contributions for 20 years, which will grow the sum even higher.
Many people still don’t know about this because they choose to contribute to the Supplementary Retirement Scheme offered by banks, which earns 0.05 per cent interest, just to save on taxes instead of enjoying SA’s tax relief and high interest.
The end of ‘shielding’
Many savvy members used to exploit a widely known loophole to “shield” their funds in SA when they turned 55.
They did this by putting the bulk of the SA funds into short-term investments a few months before turning 55. So when they turned 55, the CPF Board had to draw on their OA funds instead to form the Full Retirement Sum, as they had insufficient funds left in the SA.
Once this process was over, members would cash out their investments so that the funds would go back to their SA to earn the higher interest.
But the impending SA change makes it pointless to execute such “shielding” because those who do so will just see their invested funds go to the OA because the SA will no longer exist to receive them.
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What you should do
Since the main purpose of the SA is to grow your savings, you should take advantage of the new Enhanced Retirement Sum (ERS) that comes into effect in 2025.
Consider moving the consolidated funds in your OA and make top-ups to reach the new ERS of $426,000 so that you can enjoy monthly payouts of $3,330 under CPF Life.
Excess cash in the OA can also be placed in fixed deposits of certain banks or in government bonds if you are keen to earn interest rates higher than the OA’s 2.5 per cent.
Die-hard CPF fans will surely bemoan the loss of the SA, but there is a silver lining for them.
While some of these members have high savings in their CPF accounts that enable them to earn equally high interest of $30,000 to $40,000 annually, they baulk at withdrawing any money from the CPF.
When it comes to withdrawals, the rules state that the funds will come from the SA first, and this creates a mental barrier for savvy members who would think twice before reducing the balance of their higher interest account.
But with the expiry of the SA, they can choose to just spend their annual CPF interest after the amount is credited yearly without affecting the original balance. After all, that is how you should make use of your CPF, which is to spend the money there gradually in your old age.
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