The government has re-affirmed its stand that they will not allow parents to use their CPF for their children’s overseas education. It fears that the parents will be left with little retirement funds should their children not pay back their parents.

Currently, CPF members can use up to 40 per cent of their Ordinary accounts to pay for their children’s education in local tertiary institutions only.

No CPF for Studies Abroad (Straits Times)

Parliament has just passed changes to the CPF Act to auto-include those with $60,000 in their Retirement Accounts at the age of 65 into the CPF Life scheme.

Previously, only those with at least $40,000 in their Retirement Accounts when they turned 55 from 2013 would have been auto-included in CPF Life.

Now, those with at least $60,000 in their RA when they are 65 from 2023 onwards will also be compulsory opted into the CPF Life scheme.

This change will affect mostly those whose CPF balances have some additional form of net inflow (on top of CPF interest) from the age of 55 to 65. These could be from property refunds, top-ups, interest income and employment wages if the members continue working.

According to Manpower Minister Gan Kim Yong, the change will increase the participation rate of the scheme’s first auto-included cohort from 70% to 80%.

Mr Gan also announced other changes of how CPF savings of deceased members would be disbursed to their beneficiaries.

From January 2011, CPF members can choose to have their savings transferred directly to the CPF accounts of their nominees, instead of having the payouts made in cash upon their death.

Also, the CPF Board will automatically disburse the money to the nominees instead of having to wait for nominees to apply for the bequeathed funds.

Changes will also be made to the way the CPF Board manages unclaimed monies of deceased CPF members.

CPF savings left unclaimed for six months upon the member’s death will be moved into the Ordinary Account, which pays a lower interest than that for the Special, Medisave and Retirement Accounts.

These CPF savings, if left unclaimed for seven years following the death of a member, will be taken over by CPF.

Over the last few years, the beneficiaries of about 280 people who died annually who have not come forward to claim the money amounted to about $2.4 million each year.

I suppose the last two changes pertaining to the unclaimed monies of CPF will apply more for those people who do not make CPF nomination as those with nomination will have their money disbursed automatically to their nominees.

If you do not have an existing CPF nomination, it is wise to make one today. Note that CPF nomination becomes invalid upon marriage so you will need to make another nomination if you get married.

The Ministry of Manpower announced in August 2003 that the Minimum Sum (MS) will be raised gradually to reach $120,000 (in 2003 dollars) in 2013. The increase in MS, which includes an adjustment for inflation, is to ensure that Singaporeans set aside sufficient savings for their retirement.

In line with this policy, from 1 July 2010, the prevailing CPF Minimum Sum will be revised to $123,000, up from $117,000. Members who can set aside the full MS will receive about $1,100 per month when they reach their draw down age. The new MS will apply to CPF members who turn 55 from 1 July 2010 to 30 June 2011.

Also, from 1 July 2010,

a. The Medisave Minimum Sum (MMS) will be raised to $34,500 from $32,000. Members will be able to withdraw their Medisave savings in excess of the MMS at or after 55 years old.

b. The maximum balance a member may have in his Medisave Account, known as the Medisave Contribution Ceiling (MCC), is fixed at $5,000 above MMS and this would be increased correspondingly to $39,500, from $37,000.

As announced previously,any Medisave contribution in excess of the prevailing MCC will be transferred to the member’s Special Account if he is below age 55 or to his Retirement Account if he is above age 55 and has a MS shortfall.

To help Singaporeans save more for their medical and retirement needs, the Government will increase the employer CPF contribution rate by 1%. The increase will be done gradually in two steps to moderate the impact on employers.

The first 0.5% increase will be implemented on 1 September 2010, and will be made into the Medisave Account (MA). The remaining 0.5% increase will be effected 6 months later on 1 March 2011, and will be made to the Special Account (SA).

The Medisave contribution rates for Self-Employed Persons (SEPs) will correspondingly be increased by 0.5% on 1 September 2010.

This is a follow up on the earlier post on CPF Withdrawal and Minimum Sum scheme and will explore a couple of issues on CPF Life.

There is a handbook on CPF LIFE (guide B) which tries to explain in details how the scheme works. Before reading it, you can read the basic guide which gives an overview of the scheme.

I will not be repeating everything from the handbook but will try to extract some information from them and explain what are some of the possible misunderstandings of the scheme. This post should be read in conjunction with guide B.

Q: What happens when I join? (page 4 of guide B)

A: When you join CPF LIFE, all your retirement account (RA) savings will be used for your LIFE plan. Part or all of the RA savings set aside will be deducted to pay a premium for an annuity (called annuity premium) while the rest of your savings will remain in your RA. The annuity payout will start at various ages, depending on the LIFE plan that you have chosen.

The table in the booklet shows the annuity start age to be 90, 80, draw down age (DDA) and draw down age for the basic, balance, plus and income plan respectively.

A person looking at the table at face value might decide that he will prefer to go for the plus or income plan as he does not want to wait until age 80 or 90 before he can start to get his money. Someone using the payout calculator might also have the same thinking.

This is a misintepretation as no matter which scheme you choose, you will start getting a monthly payout from your DDA onwards.

Just that for the case of the basic and balance plan, your monthly payouts from your DDA till age 80 or 90 will come from the balance in your RA which has not been used to pay for the annuity. The diagrams from page 6 and 7 of guide B actually shows this quite clearly.

Q: Do my savings used for CPF LIFE continue to earn CPF interest? (Page 10 of Guide B)

A: Yes. Interest earned on the RA savings will continue to be paid into the RA. Interest earned on the annuity premium will be paid into the Lifelong Income Fund and pooled with the interest earned from the annuity premiums paid by the rest of the CPF LIFE participants to provide the life long payout under the scheme.

In addition, you will earn the extra 1% interest on the first $60,000 of your combined CPF balances including the annuity premium (less annuity payout) that had been deducted from your RA. This extra interest will be paid into your Retirement Account.

The “YES” here should not be taken at face value. A wrong assumption here is to think that no matter which plan you choose, there is no difference and you will continue to collect full interest.

The difference is that interest paid to your RA goes directly to you while interest paid from your annuity premium goes into the Lifelong Income Fund which might or might not benefit you (depending on how long you live). This will make a difference to the amount you leave to your estate should you pass away.

Say I have $100k. The estimated annuity premiums payable at age 55 should I opt for basic, balance or plus plan are $10k, $30k and $100k  and my RA would have $90k, $70k and $0 respectively.

After 10 years (at age 65), my RA would have (assuming 4% interest) $133k, $103k and $0. If I kick the bucket at that time, my estate will get the balance of my RA plus the unused annuity premiums which works out to be $143k, $133k and $100k respectively. So, someone who dies early will not be able to benefit from the interest earned in the Lifelong Income Fund which is reflected as a lower payout to the estate.

Basically, all these “lost interest” will be used to fund the monthly payouts to those who live longer. There is nothing wrong with this as this is the core essence of an annuity plan –  the pooling together of longevity risk.

However, if everyone starts living beyond 85, the scheme will either become unsustainable or payouts will have to be reduced significantly.

Under the old scheme where you only get $X/month for 20 years, it is simply not possible for everyone to get $X+y/month for life if the interest rate is the same under both schemes. Where does the extra money come from?

So while you are opting for your plan, bear in mind that the monthly payout figures are only projections which assumes a certain mortality rate and interest rate. There also isn’t a guaranteed minimum payout, which would have helped members see what is the “floor” of their monthly payout.

Another minor point is on the extra 1% interest earned which is supposed to go into your RA. Note that 1 or 2 months before your DDA, the Board will deduct another annuity premium from additional monies which had gone into your RA from age 55 to 65. This of course includes the extra 1% that you have been earning. The deduction will be based on the proportion of the original CPF Life plan that you choose (Page 12 of Guide B).

The last point I want to address is someone asked whether the premium that goes into the annuity scheme is fixed or based on a percentage.

It is actually based on a percentage of the amount you have left in your CPF as part of the Minimum Sum. The percentages of 10% and 30% for the basic and balance plan that is given now is only an estimate.

So, if I have $50k in my RA and opt for the basic plan, $5k (assuming an estimate of 10%) will be deducted to fund the premium. If I have $117k, then $11.7k will be deducted. Even if I have $200k in my CPF, it will still be $11.7k as I would have withdrawn $83k from CPF (after meeting the Minimum Sum requirements) leaving behind $117k in the RA.

Taken from the FAQ on the CPF website:

Q: Is there a maximum amount that I can use to join CPF LIFE?

A: When you join CPF LIFE you use all your Retirement Account (RA) savings to join the scheme. The maximum amount that you can use to join CPF LIFE is therefore the maximum amount you have in your RA which is the prevailing Minimum Sum (MS).

Q: Why can’t CPF members commit more than the prevailing Minimum Sum into CPF LIFE?

A: Some CPF members may want a higher lifelong income and are willing to pay more for this. The National Longevity Insurance Committee had considered this but recommended that CPF Board should focus on operating CPF LIFE as an integral part of the Minimum Sum (MS) Scheme. The MS represents the basic retirement sum that the Government will help members to accumulate. Should members desire higher monthly income beyond what is provided by the prevailing MS, they could buy annuities from commercial providers.