If you ask Heartland Boy what is his biggest worry right now, his answer will be “Retirement”. Not his retirement, but his parents’ retirement. He only came to know about his parents’ lack of retirement funds when he helped them to set up two-factor authentication (2FA) for their respective SingPasses. Armed with their SingPasses and with their permission, he proceeded to log onto their Central Provident Fund (‘CPF’) accounts to steal a glimpse.
His heart sank.
Their retirement prospects are bleak and it will inevitably become an issue for his family to grapple with in the near future. At their age, capital protection is paramount, however little amount that they have. In order to grow his parents’ retirement funds in a risk-free way, he decided to rely on CPF’s extra interest rate on his parents’ retirement account savings.
Cannot afford to retire in Singapore
In Singapore’s heartlands, it is quite common to overhear statements such as “Singapore is so expensive, we cannot afford to retire”. To verify the accuracy of this statement, Heartland Boy dug out some figures. Based on the 2016 Annual Report by CPF Board, about 55% of active CPF members were able to meet the current Full Retirement Sum in 2016. (either fully in cash or by a combination of Basic Retirement Sum with a sufficient property pledge) The estimated payout by CPF LIFE for someone who meets the Full Retirement Sum (‘FRS’) in cash at age 55 in 2016 would be approximately $1,220 to $1,330 upon reaching age 65. Depending on the retiree’s lifestyle, it may not be sufficient but it is still decent by all accounts.
Unfortunately, Heartland Boy’s parents belonged to the minority who were not able to meet the FRS.
Actually, come to think of it, even if we add both their combined retirement account balances together, the amount would not meet the BRS for Year 2017.
As self-employed hawkers for over 20 years, they did not have the luxury nor the self-enlightenment to contribute to their CPF accounts in the past. By the way, it is not as if his parents have other assets lying around. The only asset they can rely on would be the fully paid HDB flat which they are currently staying in. Therefore, they fall into the classic conundrum of being asset rich but cash poor. Without external help, they would literally work till their last breaths given that they have no retirement savings.
Additional Extra Interest Rate for CPF Members Aged 55 And Above
As part of the Government’s effort to enhance the retirement savings of CPF members in Singapore, CPF members aged 55 and above will get an additional 1% extra interest on the first $30,000 of their CPF savings (of which up to $20,000 can come from Ordinary Account). This will be additional and on top of the extra 1% interest paid on the first $60,000 of a member’s combined balances (of which only $20,000 can come from Ordinary Account) When these “additional extra” and “extra” interest rate add up, it is possible for the first $30,000 in a Retirement Account to be earning 6% per annum.
Based on this ruling effective from Jan 2016, here are the respective interest rates for the different CPF accounts belonging to Heartland Boy’s parents. Note that both his parents are aged over 55.
|Heartland Dad||Heartland Mum|
|Balance ($)||Interest Rate||Balance ($)||Interest Rate|
|Retirement Account||37,432||6% for first $30,000, 5% for remaining balance||9,265||6%|
CPF Interest Rate Table For Heartland Boy’s Parents Based On 2017 Interest Rates
It is evident that Heartland Boy’s mum has ample headroom to take advantage of the additional extra interest rate (1%) and extra interest (1%) paid on the first $30,000 of her combined CPF balances. As for his dad, any incremental balance in his CPF account that is still within the first $60,000 of his combined balances (with up to $20,000 from his OA) would still qualify for the extra interest (1%).
Cash Top Up To Parents’ Retirement Accounts
The relief for Heartland Boy’s siblings is that the parents are still in a position to find employment to provide for themselves. However, they can only land low-paying jobs with low CPF contribution. The increase in their CPF accumulated balances would be painfully slow. While the parents are in this period of self-subsistence, the children can leverage on this window of opportunity to grow the parents’ retirement funds. Specifically, they can provide a helping hand by tapping onto CPF’s Retirement Sum Topping Up Scheme (‘RSTU’). Instead of giving his parents monthly cash allowances, Heartland Boy has replaced this with annual cash top up to their retirement accounts. The process is really simple and straightforward. Here is a step-by step guide.
1. Giver should log on to cpf.gov.sg with his or her SingPass
2. Select “My Requests” from the list of Online Services as shown below
3. Select “Contribute To My Recipient’s Retirement Account Using Cash” (if your parents are below age 55, select My Recipient’s Special Account instead) Choose your preferred payment option.
4. Select Transfer to my “Parent” and insert your parent’s NRIC/CPF Account Number details. Proceed to acknowledge the disclaimer policy.
5. Your parent’s name will be reflected in the next page. Proceed to key in the amount that you wish to top up with cash.
*If you are using cheque, simply complete the form and mail it to CPF Retirement Schemes Department.
A High-Yield Instrument With Tax Reliefs
Because of his mum’s age, this cash top up from the children can be withdrawn (albeit on a monthly basis based on CPF LIFE payouts) to supplement her retirement income in less than 5 years when she turns 65. Therefore, this cash top up to her retirement account is equivalent to buying a 5-year, AAA-grade municipal bond with an annual coupon payment compounded at 6%. It easily triumphs the interest rates dangled by various banks on similar fixed deposit products. In summary, this is an interest rate which has no parallel in today’s low-interest rate environment. Depending on their health and ability to find employment when they turn 65, Heartland Boy may even recommend delaying their payout starting age so as to increase the monthly payouts.
The benefits of this mechanism extend beyond the beneficiaries, i.e. the parents. Because the funds in his parents’ retirement accounts are less than the current FRS, cash top-up to their retirement accounts will attract dollar-for-dollar tax relief of up to $7,000 per year for the children (giver). Given their severe lack of retirement funds, topping up their retirement accounts shall be one of the key pillars for Heartland Boy to save on income taxes.
Another scheme, similar in concept and principle, is to do a cash top-up to their respective Medisave accounts. It is clear that their Medisave accounts have not reached the Basic Healthcare Sum yet, which is set at $52,000 in Year 2017. However, for such a cash top-up, it is the parents and not Heartland Boy, who will be entitled for personal income tax reliefs.
Heartland Boy hopes that the children can turbo charge his mum’s retirement funds through a combination of cash top up and higher interest rate earned in the CPF Retirement Account. The objective should be to amass $60,000 as quickly as possible so as to take advantage of the additional interest rates. Hopefully, this little bit of retirement planning does not come as too little, too late.
N.B. The cover photo reminds Heartland Boy of his parents selling fish soup.
I have the same approach since some years back with yearly 7K topup for my mum. Helps in tax reduction as well. With the mthly payout, i no longer gives my mum cash allowance. Both of us are happy with the arrangement and gives her visibility for long term”pension” from me.
That’s great. It’s clearly a win-win for both parties.
do you have to go cpf board to update the mthly payout after every topup or does cpf auto calculates the new mthly payout? for minium sum scheme.
CPF will auto update mthly payout and provide in following mth
I have often mulled over doing this RSTU too. However, how much monthly payout can be expected from each 7k contribution? While it helps us save taxes, the monthly payout will probably be very inadequate for parents’ use.
I did a trial and error on CPF LIFE estimator. For a male aged 55 this year with existing RA of 50,000, the estimated payout at age 65 is $450-$490. If this RA is increased to $57,000, the estimated payout is $504-549. So the $7,000 that you provided led to an incremental $50 per month for life.
Thank you for taking the time to calculate!
With the calculations in mind, it is now very safe for me to say that my parents would never accept 7k CPF top-up as a substitute for 7k cash! Haha, simply because there isn’t enough for them to spend monthly.
I guess because your parents are still employed, your contribution is seen more as a 心意 rather than necessary for survival. For someone like me, I think I might have to do RSTU on top of regular monthly allowance (if I have spare cash lying around!)
Once again, appreciate your earlier reply!
I went through the same process a couple of years ago. The CPF balances were also similar or worse for my self employed dad and my mum who is a housewife. Our parents gave up alot bringing us up (and also due to lack of financial kniwledge) and it’s good that we start to plan to take care of them.
As a suggestion, I would propose u transfer their remaining OA into their RA/SA to increase the interest rate since the HDB has already been fully paid. Cheers
Thanks for sharing your story as well. You are an awesome child and I am sure your parents will appreciate this gesture of yours.
Thanks for the suggestion. I already transferred the bulk of it a couple of years ago when I did some spring cleaning. Now there’s just a couple of hundreds left in their OA. Thanks!
Just to confirm, the voluntary top ups cannot be withdrawn other than the monthly annunity right? That is to say if she wants to withdrawn a lump sum and reduce her monthly payouts when she’s say, 75 years old. It can’t be done?
Hi Jay, maybe you can refer to this article of mine to determine how much can be withdrawn. I have listed out various scenarios.
Currently, I have a housing loan of outstanding $25k @ 3.16% as my parents are PR. I am the one paying off the monthly instalment at $480 currently.
I would like to seek your opinion if I should top-up my parents CPF RA or clear off my housing loan first. My parents CPF accounts are similar to yours in 2017.
I have set aside 10K currently to either pay partially the loan or top-up my parents CPF RA.
Which one do you recommend? Or should I split 7K for top-up to enjoy the tax relief and remaining 3K for the housing loans?
Thanks for writing in. Do you face any penalty for early prepayment of your bank loan?
If topping up 7K allows your parent to earn 6% interest rate and entitles you for tax relief, i would prioritize that. The remaining 3K can be used to pay down your loan if there is no prepayment penalty.
Thank you for your reply. I do not face any penalty for early prepayment of the loan as it is from HDB. I have followed your suggestions by topping up 7K for my parent and 3K for the loan. I would like to clear off the remaining loans from HDB as soon as possible as the interest rate is quite high.
Thnks, for sharing.