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.
|6% for first $30,000, 5% for remaining balance
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.