Getting down to some common misconceptions CPF LIFE

Several months ago, I wrote an article about my mum reaching the CPF withdrawal age of 65. As with any Central Provident Board (‘CPF’) topic, it generated plenty of interest amongst my readers. In fact, I received plenty of messages (both private and public) and I attribute this phenomenon to 2 key reasons – (1) I advised my mum on the wrong decision with her CPF LIFE and (2) CPF withdrawal age is the cornerstone of every CPF member’s interest. While I was inundated with these messages, I also realised that some of these were simply misconceptions of CPF LIFE. Therefore, I decided to write a new blog post dedicated to dispelling some of the common misconceptions of CPF LIFE.

What Is CPF LIFE?

The LIFE in CPF LIFE stands for Lifelong Income For The Elderly. This is a national longevity insurance annuity scheme that provides CPF members with monthly payouts for as long as they live. Top marks for the civil servant who came out with this name and the ensuing acronym. Jokes aside, note the words I highlighted in bold and this is my interpretation to help the man on the street.

• National because all CPF members born in year of 1958 or after are automatically included in the scheme, provided they have at least $60,000 in their CPF Retirement Accounts (‘RA’)
• Insurance means protection against a possible outcome (in this case, longevity)
• Longevity when viewed in the context of insurance means the risk of living for longer than expected
• Annuity means receiving regular payouts, usually for as long as you live

It is easy to understand why topics on CPF withdrawals and CPF LIFE plans are the most hotly debated because most, if not all, CPF members don’t want to lose out in a scheme that they are coerced into participating. It’s a very local mentality – we call it kiasu in colloquial terms. Everyone is afraid of losing and wants to come out on top. Fair enough, afterall this is lifelong savings that we are talking about; one that is probably exchanged with years of sweat and blood.

Hence, I accept that some of my opinions can come across as controversial but I hope we look at this more objectively so that we can make more informed decisions on CPF LIFE. So here are some of the most common misconceptions which are often embedded in the comments to CPF LIFE discussions that I have come across.

Q1: When do I win in this CPF LIFE scheme?

Since CPF LIFE guarantees lifelong payouts, you basically start winning once you have received all your CPF LIFE premium and its accompanying interest. For those who are interested to run the math, note that the accompanying interest is calculated as:

• 4% on funds in your Retirement Account (‘RA’)
• Extra 1% on first $60,000 in your CPF accounts
• Additional extra 1% on first $30,000 in your CPF that is eligible to all CPF members aged 55 and above as shown in Diagram 1

As an example, if $100,000 was withdrawn from your RA as CPF LIFE premium, you win once your cumulative monthly payouts exceed the premium and its accompanying interest over the years.

Great, now that you know how you start benefiting from the scheme, but what if you pass away unexpectedly before you reach that milestone?

Q2: What happens to your CPF LIFE if you pass away after withdrawals have begun?

After death, a CPF member’s CPF savings will be distributed to the nominees. This is the formula that forms the bequest:

BEQUEST = Remaining CPF Savings + CPF Life Premium Paid – Payouts Received thus far

One conspicuous thing missing from the equation is the interest earned from the CPF Life Premium. That is one of the key reasons why CPF members feel shortchanged, resulting in a desire to “win” this game of CPF LIFE.

Q3: Why cant CPF LIFE include both my premium and interest as bequest?

CPF LIFE as an insurance scheme will not be sustainable if it has to pay out the premium, its accompanying interest and yet guarantee a CPF member’s lifelong payouts as long as he/she lives.

The last I check, money still doesn’t grow on trees, so surely something’s got to give. And that something is the interest earned from the CPF member’s premium in the event of his/her death.

Q4: How do I ensure that I don’t lose out on the interest of my CPF LIFE Premium?

During discussions on CPF over lunch with your fellow rat race participants, you might have come across this statement, “If you don’t live till age XX, you will lose money from CPF LIFE”

So what is this XX? On forums such as HardwareZone, the suggested breakeven point ranges from 88 to 90 based on CPF LIFE estimator and that is dependent on the monthly payouts which are not guaranteed by the way.

The answer is simple- outlive the majority of your peers in this game of longevity risks. The average lifespan today is almost 84 years and this will keep increasing given the advancement of medical science. So you now understand what I mean by outliving most of your peers if you don’t want to lose out on your CPF LIFE premiums.

Q5: Why are CPF LIFE payouts not guaranteed?

Wait, did you state earlier that the level of payouts from CPF LIFE are not guaranteed? This is to allow the insurance scheme to remain self-sustaining, especially when interest rate drops or life expectancy goes up beyond actuarial expectations.

CPF Board assures that that any adjustments are expected to be small and gradual as CPF LIFE payouts are “designed to be stable”. This can be quite challenging for retirees because it is particularly this group of people who requires a guarantee on their retirement payouts more than anything at this stage of their lives .

Q6: I have decided to defer my payouts, but I have changed my mind now. Is the decision reversible?

Absolutely, the decision is reversible and this was exactly what happened with Heartland Boy’s mum. After another round of explanation, she agreed to commence withdrawals instead of deferring it to age 70. Since she doesn’t need the money now, the monthly payouts will flow into her UOB Stash Account. The interest rate is undeniably lower but she knows that the money is there should she decide to use it one day. The factors behind the decision making go beyond pure financial math but also some emotions which I probably did not consider the first time round.

For those who have a change of mind after having made the initial choice, please refer to CPF’s FAQ as shown in Diagram 2.

This sums up the answers to 6 basic questions on CPF LIFE that I have encountered. At the core of these questions is the desire “not to lose”, which is quite at odds with how an insurance is designed to be in the first place. There are many more interesting questions, especially those pertaining to CPF LIFE plans (basic, standard, escalating) which I may do a follow up article on when I eventually find the time.

This article is published on 10 Sep 2023.

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