By Paul Ho (guest contributor)
For Singaporeans, reaching 55 years old marks a major milestone from the perspective of personal financial planning. At 55, you can withdraw a portion of your Central Provident Fund (CPF) savings. Yes, finally after years of waiting, you can use the money locked up in your CPF!
But hang on… before you start planning for your next holiday destination or researching your second property, reaching 55 does not mean you can simply go to the CPF to withdraw any amount you want. The CPF, Singapore’s pension scheme, has other plans for your funds.
What happens to your CPF when you turn 55?
First, you need to make sure that you have enough savings in your Special Account (SA) and Ordinary Account (OA) to make up the Minimum Sum (MS) of $155,000 in your newly set up Retirement Account (RA).
Up to 50% of the Minimum Sum (MS) can be accounted for with your property if you had used CPF savings to pay for your property. However, if you sell your property after 55, any amount drawn down from the CPF previously to purchase the property plus accrued interest will now have to go back to your CPF.
On top of that, there is still the Medisave Account which has a mandated Minimum sum of $43,500 which will have to be topped up before any funds are withdrawn.
This means that the Total Minimum sum is a whopping $198,500 (Minimum Sum (MS) + Medical Minimum Sum (MMS) = $155,000 + $43,500).
CPF Life – a Compulsory National Annuity Scheme
Most of the funds in your RA will be for a compulsory national annuity scheme, also known as CPF Life, which gives you a monthly payout when you reach 65 for as long as you live.
There are two plans:
a) CPF Life Standard Plan, which provides higher monthly payouts and lower bequests; and
b) CPF Life Basic Plan, which provides lower monthly payouts and higher bequests.
Under the CPF Life Standard Plan, the first installment of your annuity premium of up to $77,500 (or half the MS) will be deducted from your RA.
And before you hit 65, the rest of your money in the RA will go into the second installment of your annuity premium.
This means that basically all the money in your RA will go towards an annuity scheme under this CPF Life Standard plan, which happens to be the default plan if you do not select one.
Under the other plan, CPF Life Basic Plan, a small portion of about 10% of your RA savings will go into your first installment and another portion will be made for the second installment as you approach 65. The amount of annuity premium deducted depends on your age and gender.
Buy a Second Property Before 55 to Protect Your CPF Money?
Many people have called us to enquire about buying a second property using their CPF as they are afraid that the money gets taken away into Retirement account. Also the controversies regarding how the CPF funds are channeled by the government has increased the anxiety of some.
Let’s take the scenario of Mr. Tan who is currently 54 years old and evaluating whether to buy a property. He currently owns a private property. This property is used as a pledge for 50% of the Minimum Sum. He has the following savings in his CPF:
Ordinary Account = $120,000
Special Account = $55,000
Medisave Account = $23,500
At 55 years old, a Retirement Account would be created. All the monies will be transferred from the Special Account (SA) into the Retirement Account (RA) and his Medisave Account (MA) will be topped up. After this transfer his account situation will look like this:
Retirement Account = $155,000
Ordinary Account = $0
Special Account = $0
Medisave Account = $38,500 (Medisave Minimum Sum is $43,500)
Only a $5000 withdrawal is possible.
There is still a Medisave Account (MA) Shortfall of $5,000.
However, only $5,000 can be withdrawn at 55 years old. This means that between 55 and 65 years old, there is practically no additional income.
Many people who are now in their early 50s and who have some CPF monies are approaching us to discuss using their CPF Ordinary account to buy another house. If they buy a second house, they only need to meet 50% of the Minimum Sum, which is $155,000 * 0.5 = $77,500. Anything in excess of $77,500 can be used. We can see this rule from the CPF website:
“C. USE OF CPF TO PURCHASE MULTIPLE PROPERTIES
If you already own a property bought with your CPF and wish to buy another property with CPF, you should take note that you may do so only after you have set aside half of the prevailing Minimum Sum in your Ordinary and Special Accounts. The maximum amount of CPF you and your co-owner(s) may use for your second and subsequent property is capped at its VL.
* The Minimum Sum changes every July. Please refer to the CPF website for information on the prevailing Minimum Sum.”
Mr. Tan, has $120,000 in his OA and $55,000 in his SA. In other words, since he already has a private property as a pledge towards the Minimum sum of $155,000, he can use any sum of money in excess of $77,500 for his second property purchase, provided it is in the Ordinary account (OA).
$120,000 + $55,000 – $77,500 = $97,500.
Thus Mr. Tan can use $97,500 for his second property purchase.
If this money is used ahead of him turning 55, it does not go into the Retirement Account. However buying a second property has the following implications:
- The Additional Buyer Stamp Duty of 7% (for the second property) is a whopping $70,000 of tax if the cost of the property is $1 million.
- His first property is used as a pledge and upon sale of the property, proceeds from the sale will go into topping up his CPF account together with accrued interest.
- He can only borrow up to a reduced Loan-to-Value of 50% (i.e. only 50% loan size and 50% downpayment) if his first residential property has an outstanding loan.
- Mr. Tan is already 54 years old. Hence the loan eligibility is lower as the Total Debt Servicing Ratio criteria is tough. His loan tenure will be short at 10 to 11 years tenure (max 65 years old for 80% loan). If he earns $10,000 a month, he can only pass the TDSR if his loan amount is around $656,000. He will need another borrower to join him if he wants to buy a dearer property.
Issues you should consider if you are approaching 55
While a monthly payout in your old age sounds good, having a substantial portion of your savings being tied down for this compulsory annuity scheme raises a few issues worth considering:
- Am I better off reinvesting the money on my own?
- Will I live long enough to be able to use my hard earned money?
- What can I do now to better plan for myself financially?
- Should I downgrade to a smaller flat since funds received from the sale of property now goes into meeting the MS in my RA?
- Should I take the opportunity to buy another property now to use up my funds before all the money goes into my RA when I reach 55?
- Should I use my CPF to pay down my existing housing loan (if it is not paid up in full)?
Each individual’s needs and aspirations are different. And it helps if you think about these issues so as to prepare yourself for this major milestone.
Buying another residential property at 55 is a major decision. The repayment commitment is heavy given the short loan tenure. Apart from that, you still have to do proper research to make sure you are not overpaying.
Suggestions for the Government
While the government’s plan to make everyone compulsorily save for retirement is legitimate, it places an undue strain on citizens. Structural income inequalities need to be sorted out. Part of the inadequacy in retirement funds could be due to the low returns from CPF funds. Hence the government can explore ways to ameliorate this shortfall – this would ensure that Singaporeans can live and age gracefully.
By Paul Ho, holder of an MBA from a reputable university and editor of www.iCompareLoan.com, Singapore’s first Cloud-based Home Loan reporting platform used by Property agents, financial advisors as well as Mortgage brokers.