Is Your CPF The Ultimate Piggy Bank?

"One can die, but cannot fall ill". This Chinese saying seems to be particularly appropriate for the case of Singapore as we often complain about the rising costs of living, in particular our housing and medical costs. As Singapore is the most expensive city to live in, this result in our emphasis on the need to accumulate and grow our wealth to combat inflation and other increased costs.¹ CPF was originally created with the aim of helping Singaporeans to save for their retirement but has since diversified to include the financing of our housing purchases and medical costs.²

However, Singaporeans are generally divided in their views on the mandatory monthly CPF contributions. While there have been supporters for CPF as a saving mechanism, others dispute the necessity of this. Acknowledging both perspectives, we weigh the pros and cons of using CPF as your saving tool.

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The advantages

Think of CPF as a fixed deposit that only matures during your retirement, would this make the mandatory monthly contributions sound a lot more pleasant? The 4 per cent interest rate given to our CPF Special Account (SA) with an additional 1 per cent on our first combined S$60,000 allows us to treat our CPF like a 'risk-free investment'. Providing a reliable absolute return, protection from creditors and an interest rate that beats inflation, Singaporeans can consider treating our CPF accounts like a saving plan. By allowing the money and interest to compound over a period of time, a couple could achieve a combined savings of S$1 million by their retirement.³ This provides them with a safety net, knowing that they have secured a nest egg for their retirement.

Take for example the couple to both be 30 years old with a monthly salary of S$3,500 each. Assuming that they start without any savings in both accounts and work until the age of 55 with no increments and bonuses, they could still achieve more than half a million each by the age of 65 if their CPF funds were not utilised to purchase a property. This would potentially give the couple more than S$1 million combined savings in their CPF.

Table 1: Projected savings in CPF Ordinary Account (OA) and Special Account (SA) of an individual

Moreover, under the CPF Retirement Sum Topping-Up Scheme, tax reliefs would also be given when you voluntarily top up your retirement account.⁴ This scheme could allow you a dollar-for-dollar tax relief of up to S$7,000 cash relief per calendar year.⁵ For example a man who chooses to top up S$7,000 to his CPF Special Account at the age of 35. Assuming that he receives the 4 per cent interest in his Special Account with no 1 per cent additional interests, at the age of 55 he would have a balance of S$15,951 in his CPF Special Account which gives him S$8,951 from his compounded interest. Furthermore, this would also give him S$7,000 tax relief. Thus, using your CPF like a retirement savings plan could allow you to enjoy benefits such as better interest rates and reduced tax payments.

Table 2: Projected compound interest earned in CPF Special Account

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The disadvantages

There are however, downsides to using your CPF as a savings account with the lack of liquidity in cash flow being a main concern. Additionally, with CPF transfers and top ups being irreversible, doing so is not advisable unless you have cash to spare. Moreover, as our SA account is untouchable before retirement age, this locks your money into your CPF until the allowed withdrawal age of 55. Therefore, choosing to use your CPF as a saving account would require you to be extra careful with your current finances as a lack of financial prudence could be disastrous. Hence, despite the attractive interest rates that CPF offers, careful consideration is required before making a decision.

Although some home buyers may prefer to use cash instead of CPF for the purchase of their house, this has to be carefully planned to ensure the cash expenditure remains within comfortable levels. While leaving your CPF untouched could compound your interest income faster, doing so would stretch your finances thin if you are paying for more than what you can comfortably afford. As such, unless you have cash or disposable income readily available for the down payment and subsequent mortgage repayments, it would not befeasibleto avoid using CPF for the payment of your house.

(See "3 Surprising Facts About CPF Life You Probably Didn't Know")

Our conclusion

Ultimately, while using your CPF as a savings account may look like the perfect plan on paper, the reality may differ. Apart from lacking liquidity in your funds, the uncertainty of the future and the opportunity costs of locking your money into your CPF accounts are also factors to consider.

With your finances locked away in your CPF accounts, a lack of spare cash could leave you vulnerable to rainy days and economic downturns. Should you meet with any mishaps, or urgently require money for an emergency, the lack of available cash may also make you ill-prepared for such situations. Therefore, while you can treat your CPF like a "piggy bank" to save for retirement, it is insufficient to rely solely on CPF.

Planning ahead and thinking for the future is important for us as we want to always be financially prepared for any unexpected events. Therefore, as much as we want to accumulate and grow our wealth, it is also important for us to set aside a portion of our savings as our readily accessible emergency fund. Additionally, we should only engage in investments or saving plans that are suitable for us and satisfies our requirements for fund mobility and maturity. Rather than only relying on our CPF, we should instead use it to complement other plans to ensure that we are well-covered and financially prepared for our future.

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How FSMOne can help you get on track

Our team of friendly advisers are able to help you review your financial objectives, long term commitments, and offer you investment and insurance advice specific to your needs. If you would like assistance in reviewing your financial and protection portfolio, or simply to get a quote for an insurance plan, you can contact our advisers at advisory@fundsupermart.com.

^{1Source: http://www.todayonline.com/singapore/singapore-ranked-worlds-most-expensive-city-again}

^{2Source: https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview}

^{3Source: http://www.straitstimes.com/business/invest/saving-1m-through-cpf}

^{4Source: https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/retirement-sum-scheme#others%23}

^{5Source: https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/retirement-sum-scheme}

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