Financial Tips: Top up the CPF for Your Child and "Save" a Millionaire

Financial Tips: Top up the CPF for Your Child and "Save" a Millionaire

 

https://www.zaobao.com.sg/finance/singapore/story20250216-5856533

 

February 16, 2025

 

Chen Zijun

 

Since a child's birth, the government has been creating a Central Provident Fund (CPF) account for the newborn to distribute Medisave grants. Some shrewd parents make full use of the CPF system. As early as when their children are young, they top up their children's CPF accounts to help them accumulate wealth. There is a saying going around that if you top up your child's CPF account early, you can increase the deposit through compound interest, enabling your child to become a millionaire in the future. How can this be achieved? What risks should be noted? In this issue of "Financial Tips", we invite experts to share how to make good use of the CPF scheme to give children a head start.

 

More and more young children have deposits in their CPF Special Accounts. As of December 31, 2024, about 3,800 children under the age of five had balances in their CPF Special Accounts, 400 more than the previous year.

 

Data provided by the CPF Board to Lianhe Zaobao shows that the median deposit of these children is about S$1,000. Most of the deposits in the CPF Special Accounts of young children were topped up for them through the Retirement Sum Topping-Up Scheme by others. Anyone can top up a child's account, not just their parents.

 

The authorities revealed that among those who topped up the Special Accounts of children through the Retirement Sum Topping-Up Scheme, eight out of ten live in HDB flats.

 

Luo Qingquan (52 years old), a financial video producer, is one of the parents who topped up his children's CPF accounts when they were young. The father of three children aged between 20 and 23 said in an interview that he started topping up his children's CPF accounts about 15 to 20 years ago when they were young, depositing between a few thousand and more than S$10,000 in cash every year.

 

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3,400 Children Have Deposits in Their CPF Special Accounts, and the Number Has Been on the Rise in the Past Five Years

 

Luo Qingquan's goal is to accumulate S$60,000 in his children's Special Accounts. This is because members under the age of 55 will receive an additional 1 percentage point in interest on the first S$60,000 of their savings, or a maximum of 5%. For a savings of S$60,000, this is equivalent to an annual interest of S$3,000.

 

He said, "The children's Special Accounts currently have about more than S$80,000 to more than S$100,000. Assuming that the interest rate of this account remains at 4%, when they retire in the future, the money in it will increase by more than four times like a snowball."

 

According to his calculation, if parents top up S$64,030 all at once when their child is born, assuming that the interest rates of the CPF Special and Medisave Accounts remain at 4% and the interest rate of the Ordinary Account remains at 2.5%, then when the child reaches the age of 65, this sum of money will increase to more than S$1 million through compound interest.

 

If parents do not want to top up a large sum of money for their children's CPF at once, they can also choose to top up in installments.

 

The Deposits in the Special Account Are "Locked" Until the Child Turns 55

 

Suppose parents top up their child's Special Account for 20 years, from birth to the age of 20, at S$4,800 per year. When the child reaches the age of 65, more than S$1 million can be accumulated. This does not include the savings that the child will contribute to the CPF after starting work.

 

It should be noted that the money that parents top up their children's CPF accounts in cash is not eligible for tax deductions. In addition, the amount topped up for the child will be "locked" in the Special Account until the child turns 55.

 

In view of this, Luo Qingquan reminded that when parents top up their children's CPF, they should ensure that this money will not be needed for any other purpose in the future. In the long run, this approach to accumulating wealth also poses policy risks, as the government may adjust the policy or there may even be a change of government one day.

 

Last October, Parliament passed the amendment to the CPF Act. Starting this year, the Special Accounts of CPF members aged 55 and above will be closed. When members reach the age of 55, they will only have an Ordinary Account, a Medisave Account, and a Retirement Account created on the day they turn 55.

 

A spokesman for the CPF Board emphasized when asked that topping up the CPF with cash is a long-term commitment aimed at increasing the retirement savings of the beneficiaries so that they can enjoy a higher monthly retirement income. Therefore, the decision to top up the account is irreversible. The deposits in the CPF Special Account cannot be used for other purposes, such as buying a house, investing, or for other urgent needs.

 

The spokesman said, "When topping up the accounts of younger members, one should consider the long-term perspective and various financial products in the market, and assess which ones best meet the needs."

 

Lai Xinli, Head of the Financial Planning Department at MoneyOwl, said in an interview that the CPF scheme is one of the options for parents to help their children increase their savings. The main advantage is that to a certain extent, it can obtain a guaranteed return from the government and lock in a significant compound interest effect for the children. This can also enable children to come into contact with and cultivate the habit of long-term savings through the CPF system from an early age.

 

The main disadvantage of this approach is the lack of liquidity and the reduced flexibility in using the funds. Of course, due to the long lock-in period of the funds, there may be risks brought about by policy changes.

 

Make Good Use of the Child Development Account Scheme to Avoid Long-Term Capital Tie-Up

 

She said that if you are topping up the CPF for yourself or your parents, since the retirement age is not far away, CPF members are more confident in planning. Considering that children may need financial support at an earlier stage of their lives, for example, for higher education, buying a house, or starting a business, putting money into the CPF may prevent them from using these funds for a very long time.

 

In view of this, the benefit of earning risk-free interest through the CPF may not be enough to offset the opportunity cost involved in tying up the funds. Lai Xinli said, "Overall, the CPF can be one of the financial tools to help children save, but it should not be the only choice."

 

Tan Minzhi, Head of the Financial Planning Department at DBS Bank, also believes that although topping up the CPF for children is one of the ways to help them plan ahead, it is not the only option. Another more common practice includes making full use of their Child Development Account (CDA) to save money.

 

For babies born on or after February 14, 2023, regardless of the birth order, parents can directly receive a S$5,000 First Step Grant for their Child Development Account as long as they open a CDA for them. The money deposited by parents into their children's CDAs will also receive a one-for-one matching top-up from the government. The government's matching top-up limit is S$4,000 for the first child; S$7,000 for the second child; S$9,000 for the third and fourth children; and S$15,000 for the fifth child.

 

When the child turns 13, all the savings in the CDA will be transferred to the Post-Secondary Education Account, so there is no need to worry about not using it up. The annual interest rate of this account is linked to the interest rate of the CPF Ordinary Account, which is currently 2.5%. When they reach the age of 31, the unused amount in the account will be transferred to the CPF Ordinary Account.

 

Top up the Medisave Account, Like Giving Your Child an Alternative Medical Insurance Policy

 

In addition to topping up their children's CPF Special Accounts, some parents also top up their Medisave Accounts to cope with the increasing medical expenses.

 

Top up Seven Times and the Interest Exceeds S$10,000

 

In 2018, when her daughter was in Secondary One, Manager Su (57 years old) began to fill up her daughter's Medisave Account. Recently, she topped it up with another S$4,000 to S$75,500, which is the current Basic Healthcare Sum. The amount exceeding the limit will be transferred to the Special Account or the Retirement Account.

 

So far, this mother has topped up her daughter's Medisave Account seven times. She said that the deposits in the Medisave Account enjoy an annual interest rate of 4%. In the past six years, the interest has exceeded S$10,000. These interests flow into her daughter's Special Account every year and continue to accumulate at an annual interest rate of 4%.

 

"After my daughter was born, I bought her the best medical insurance policy, but the premiums kept increasing, especially the riders, which need to be paid in cash. Sometimes I think that the premiums are actually paid with the interest earned from the Medisave Account, and it feels more relaxed."

 

She said that the Medisave Account can be regarded as an "alternative medical insurance policy". "If nothing happens, the premiums of an ordinary medical insurance policy are 'wasted', but this alternative medical insurance policy gives you interest every year. It's really good!"

 

Some of her friends started to follow her example after learning about her approach, but some people think that there is no need to rush to top up and can wait until the children start working and let them top up by themselves. However, she has a different opinion.

 

"I regard this as an annual gift for my daughter. Although this money is locked up and cannot be withdrawn, it will come in handy when needed. Even when I retire in the future, if I need a large sum of money for surgery, I can also use her account."

 

She also considered that when her daughter enters the workforce in the future, since the Medisave Account is already full, the amount exceeding the Basic Healthcare Sum will go into the Special Account, which can help the child reach the Full Retirement Sum goal faster.

 

"Financial Tips" Invites Readers to Write in

 

Whether you encounter financial problems in your daily life or investment bottlenecks, you are welcome to email zbcj@sph.com.sg.

 

We will ask experts to answer your questions one by one.