Recently, a relative of mine approached me for advice on his CPF Retirement Account (‘RA’). He is in a privileged position as he had the Full Retirement Sum (‘FRS’) transferred to his RA when he turned 55. He is now exploring the option of topping up his RA to the maximum allowable limit of Enhanced Retirement Sum (‘ERS’), being $279,000 in Year 2021. However, he is confused whether it is better to use cash or CPF to top up to his RA to reach ERS and receive higher CPF LIFE payouts in the future. For those on the CPF LIFE scheme and with sufficient retirement funds, this is not a simple problem to grapple with, albeit a happy one. Therefore, I thought it might be useful to flesh out this conundrum with more details in a blog post. Finally, given his circumstances, I eventually “advised” him to use cash to top up his RA to ERS based on a decision tree framework that I developed.
Decision Tree Making Process
As the issue at hand is complex, I have decided to approach the decision-making process via a decision tree framework as shown in Diagram 1.
The decision tree sets out 2 questions to be answered:
1) Have Your Spouse Reached FRS?
If you have a spouse whose CPF balances have not reached FRS yet, it is usually recommended that you can help your spouse catch up to achieve FRS first. That is especially the case if your spouse has been a homemaker taking care of the household. There is no better way to show your appreciation of the invaluable work he/she has put in by transferring your CPF funds into his/her Special Account (‘SA’) or RA. My relative did exactly that and I really commend him for that.
Besides showing your affection, topping up your spouse’s CPF balances also acts as a form of risk diversification since it is more prudent for 2 members in the household to have sufficient levels of retirement payouts for life. Depending on the type of plan (Basic, Standard or Escalating) chosen by the spouse with higher CPF balances, his/her spouse may end up with insufficient retirement funds in the unfortunate event of the spouse’s passing. In addition, consider the case whereby one spouse is on ERS but the other does not even meet the Basic Retirement Sum (‘BRS’) – I would think that such inequality does not bode well for the long-term harmony of a marriage.
Once both you and your spouse’s RA have reached FRS, this brings us to the next question in the decision tree.
2) Does Your Cash Yield More Than 4%?
Why have I set 4% as the benchmark? Well, this is the interest rate offered by CPF for your funds in the CPF SA. Hence this is the opportunity cost involved in this situation. If your idle cash is unable to yield more than 4%, you may be better off using cash to TOP UP your RA to reach ERS. Given the low interest-rate environment that we are currently in, it may not be surprising if you find this the case. Again, I must emphasize that this refers to spare cash.
Alternatively, if you are confident that your idle cash can generate returns of more than 4%, you may be better off transferring funds from your SA or Ordinary Account (‘OA’) into your RA to reach ERS instead. For your information, in the instance of performing a CPF transfer, SA savings will be prioritised first followed by OA savings.
Unfortunately, it is no longer possible to achieve more than 4% guaranteed returns via savings accounts or even high-yield insurance savings accounts such as Dash EasyEarn. There is a need to explore products at the higher end of the risk spectrum but do consider whether it is still worthwhile to be taking high risks during one’s golden years?
With the decision tree, I hope it helps you decide which source of funds to use to top up your RA to reach ERS for eventual higher CPF LIFE payouts. At least, it helps in my relative’s case as he has decided to make a cash top-up to his RA.
Pros of Topping Up RA to ERS
When one reaches the age of 55, the RA will be created. In the absence of a property pledge, the default option is that the CPF Board will transfer an amount equivalent to the prevailing FRS from the SA to the RA to form your retirement sum. This is the case even if you have funds higher than the FRS sitting within your CPF. My opinion is that this default option of doing nothing is a case of leaving some money on the table. Here are the reasons why:
1. Higher streams of monthly income upon age 65
The main reason why we top up our RA to reach ERS level is to enjoy higher monthly lifelong CPF LIFE payouts when we eventually commence withdrawals upon reaching payout eligibility age. Whether it is a CASH top-up or a CPF transfer, the 4% interest will start compounding and contribute towards as premiums to the CPF LIFE pool.
A common misconception is that one must top up to the applicable ERS level at one go. Well, it is actually possible to top up one’s RA to any amount (as long as it does not exceed ERS) and at any time of the year. Therefore, for those who are saving up to reach ERS, you should immediately top up whatever amount that you have already set aside to allow compound interest to work its magic earlier.
In fact, as the ERS increases annually to catch up with Singapore’s inflation, you can continue to perform annual top-ups as the top-up limits does not take into consideration the interest earned in your RA. For instance, the ERS increased from $271,500 in Yr 2020 to $279,000 in Yr 2021. That allows for an additional $7,500 of top-ups. It is best that you log in online to your CPF account via your Singpass to find out the precise amount that you are eligible to top up to your RA. Go to CPF Online Services – > My Messages to find out more.
2. Quality/Credit-worthiness of the additional income
Another commonly overlooked factor is the “quality/credit worthiness” of the additional lifelong income that you are getting from CPF LIFE. It provides a reliable income stream that is less affected by the performance of the economic markets. The alternative would be to take your cash withdrawn from either your bank accounts or OA/SA and purchase investment products that are subject to the vagaries of the markets. The reliability of CPF LIFE should not be underestimated especially when most of us would be dependent on the payouts to finance our retirement expenses.
3. Cash top-up is not part of CPF Annual Limit
A cash top-up to the RA falls under the Retirement Sum Topping-up Scheme (‘RSTU’). Therefore, it does not form part of the CPF Annual Limit (which is the maximum amount of CPF contributions that can be credited to an individual’s account in a year and currently stands at $37,740. Differences between the RSTU scheme and VC scheme can be found in this FAQ.
However, I must stress that this cash top up is not eligible for tax relief if one’s RA already exceeds the prevailing FRS.
Cons of Topping up RA to ERS
1. Irreversible Move
When you top up your RA to ERS, this is considered as an irreversible move. This signals your willingness to participate and extract more benefits from the CPF LIFE scheme beyond the default option.
If you have used cash to top up your RA, you suffer an immediate loss of liquidity as they get locked up in the RA until payout eligibility age. Similarly, if you have used funds in your OA or SA to perform the RA top-up, you lose your ability to withdraw them. (Learn more about how much money you can withdraw from your CPF at 55 in this article)
As I have emphasized earlier, the issue of using either cash or cpf to top up one’s retirement account is a rare but happy problem.
This article is published on 24 January 2021
I realised that there is no benefit to transfer SA to RA to top up the FRS to ERS, as the interest rates in SA and RA are both 4%, for those age above 55.
You are right in the sense that the interest rate is the same in both accounts. However, if you do not put in more funds into the RA, your monthly payouts from CPF LIFE will not change.
In this scenario whereby the member has reached FRS, the SA is simply taken like an ATM, which allows for members to withdraw anytime they want. So, it is not wrong to say that there is limited benefit in transferring balance SA to RA as both achieve 4% interest. The only thing that determines which is better is dependent on the death year.
Hi Ricky, I think the article is referring more on transferring from OA to RA.
If you are comparing between A) leave excess funds in SA and B) transfer excess funds in SA to RA to reach ERS, the payouts you will receive in B will be higher when your withdrawal commences because you have deposited a larger premium into CPF LIFE
I have also been wondering about this option.
My thought (as I have not reached 55) so this is just a theoretical exercise.
1. Let RA reach FRS at 55
2. Then transfer cash or OA to FRS at age 64 to hit the ERS of that year – this means the CPF life payout increases.
My rationale behind is this – if you can let the funds grow at 4% in SA it is better than putting in RA as it is more “flexible” – not irreversible and you can draw out the interest anytime. But if you don’t need to draw out then allow it to grow like a defacto RA. But in emergency you have the option to touch SA funds but not RA.
At age 64, if you have sufficient fund (cash, OA and even SA) then can consider topping up to ERS to get higher payout for life. At that juncture, to me its like buying a annuity for life with a lump sum premium payment.
But I am aware that I will have to top up quite a bit as the compounding effect in OA is not as good as SA or RA.
Yes, this makes sense. However, performing a cash top up/CPF transfer to RA at age 64 leads to lower CPF LIFE payouts compared to a similar top up done at age 55. This is due to the fact that lower premiums (from your interest) have been contributed to the CPF LIFE pool under the former.
Hi thanks for fast comment. Yes this is possible that payout would be lower so I will have to check with CPF at 54 to confirm my thesis then decide what is the optimum method.
But CPF is just one tool and like you say it is a good problem to have.. 🙂
Hi, thank you for the informative write-up. I have a query to clarify:
The interests accumulated from the money in your RA from age 65 onwards will not be given back to you (your estate) upon your passing. Is this understanding correct?
Your understanding is correct, thanks.
Julie Chen says
TLTR: All interest in RA belongs to you/your estate, while all interests earned in cpf life will remain in cpf life pool after passing.
Based on my understanding, it depends on whether the person is still on RA (old) plan or cpf life (new) plan – and on which plan, here are the scenarios:
1) For those on RA (before cpf life, i.e. those born before 1958), you are basically spending what you have in RA earning at least 4% interest, so nothing goes into the ‘cpf life pool’, so all remaining funds and interest left in RA will be given to your estate upon passing.
2) For those on cpf life standard plan (or escalating plan), all your funds will be in the cpf life (pool), so the interest you earn in the cpf life will remain in the pool after passing. Only the principal sum will be given out to the estate (if any left, based on CPF LIFE Estimator, it’s around up to age 80. After 80, no bequest left for standard plan and escalating plan).
3) For cpf life basic plan, according to CPF, 80%-90% of the funds is in RA while 10%-20% of the funds is placed in the cpf life (pool). So your estate gets back some interest from the funds left in RA (in any left, depends at what age the person passes.. based on CPF LIFE Estimator, it’s around up to age 90-91.)
please correct me if I’m wrong, thanks.
When topping up the RA to ERS, the SA will be deduced first before OA. One can’t choose to solely transfer OA to top up to ERS.
Yes, you are right and this is consistent with what has been written in my article. thanks.
Thanks for the interesting article. Was thinking…. Would the transfer of SA to RA upto prevailing ERS, at the point of starting to draw down from CPF for retirement needs make sense? This is to continue to ‘maintain’ the 4% interest especially since SA will be used first for the drawdown instead of OA. Also assuming one has sufficient in OA/ other investments for remainder of retirement.
The 4% interest is the same whether it is for SA or RA. However, if you only transfer SA to RA at the point of draw down compared to at 55, you have lesser interest that contributes to the CPF LIFE pool. Therefore, a lower CPF LIFE payout for your case.
Hi Alison, what do you think about CPF shielding of the SA/OA account when turning 55? This strategy seems somewhat related to the issue that you have mentioned about using cash or OA to top up RA. Assuming we have enough cash (yielding <4% to top-up to FRS), how can we utilise these two strategies in the most optimal way?
I think it is very smart to do so. Will priortise SA shielding first, followed by OA shielding
Lim Teck Chye says
After depleting my SA to Top up ERS, can i use my balance OA to top up SA if I am 63 yrs old?
“For your information, in the instance of performing a CPF transfer, SA savings will be prioritised first followed by OA savings”. This is my understanding but you may wish to check with a CPF officer just to be very sure. Thanks.
With tbills FDs and other safe intruments having 》 4% yield , should we now withdraw all balance from OA after setting aside FRS in RA and shielding the SA to invest in either or both instead of transfer to RA? We can top up to RA later when getting higher yield
I’m turning 55 this March, many talking about CPF shielding to get 4% interest in SA instead of leaving money in OA only give 2.5% interest. After 55, we can transfer our OA to RA to enjoy the same 4% as and when right? Can i know what’s the different since both also give the same 4% return?
Transfer to RA is capped at Enhanced Retirement Sum.