Cents and Sensibility - How the upcoming CPF reforms will affect the way you plan your retirement

You use it to invest, buy property, to pay for your children’s university fees and to cope with medical bills. Now, the Central Provident Fund (CPF) system will be revamped to cater to a fast-ageing Singapore society.

The reason is simple: people are living longer, the average life expectancy today is 80 years old and a United Nations study thinks that Singapore will be the world’s fourth-oldest population by 2050.

“A system designed in 1955 for an average life expectancy of 61, left unattended would falter under the weight of needs as more grow old. It was never meant to support 20% of a population above 65, and numbering nearly 900,000 by 2030. The CPF system needs to be updated and strengthened,” said Dr Ng Eng Hen, Minister for Manpower and Second Minister for Defence at the close of parliamentary debate on the CPF reform in September. Details for the CPF overhaul are still being worked out, but they can be summarized into the following:

1. Later draw-down for the CPF minimum sum. The Later Drawdown Age (DDA) will be raised progressively from 62 to 63 years in 2012, 64 in 2015 and 65 in 2018.
2. Higher CPF returns and
3. Compulsory annuities.

Withdraw Your CPF Minimum Sum at a Later Age (Also Means Work Longer Lah)
What it is – The age to withdraw from the CPF minimum sum account (called the draw-down age) will be raised from 62 years old currently to 63 years in 2012, 64 in 2015 and 65 in 2018.

This is in the form of monthly payouts after you have set aside the minimum sum at the age of 55. The rationale is this: if the account is drawn upon too early, a retiree may outlive his savings. Based on the current scheme earning 4 per cent in interest, the annual income from the minimum sum lasts 20 years, after which the account is depleted. So what will happen to you when the money runs out at a time medical bills are bound to pile up? With a later draw-down age, you will still be able to get a monthly income you need it most.

What this means to you – Because you will be taking out your CPF money at a later age, it means that you’ll probably not be retiring at the magic age of 62. The later draw-down age ties in with changes on the workforce in the form of re-employment laws. By Jan 1, 2012, employers have to offer to re-hire workers when they turn 62 years old, if their health permits. But it may not be in the same job or at the same salary.

When it kicks in – 2012

Key things to note – The minimum sum, which is adjusted yearly for inflation, currently stands at $99,600. It will be raised gradually to $120,000 in 2013.

If you are aged 50 to 57 this year, you will receive a Deferment Bonus (D-Bonus), as you will be affected by the delay in draw-down age. This one-off bonus is up to $1,500.

If you are aged 54 to 63 years old and choose to defer your draw-down, you can get a Voluntary Deferment Bonus (V-Bonus). This is up to $600 for every year deferred.

No bonus will be paid out to CPF members under 54 years old.

Get higher CPF returns
What it is – The first $60,000 of your combined CPF balances, with up to $20,000 from your Ordinary Account (OA), will earn an extra 1% interest. For example, $60,000 in the SMRA – Special, Medisave and Retirement accounts – will earn the member an additional $7,200 over 10 years and $17,900 over 20 years. The rate for the SMRA accounts will also be pegged to a new benchmark: the 10-year Singapore Government bond yield, plus an extra 1 percentage point.

What this means to you – Higher returns for your CPF savings. But from 1st April, 2008, you cannot use the first $20,000 in both the OA and Special Account for investment. Existing investments using CPF monies will not be affected. The re-pegging of the SMRA to bond rates means more room for higher returns, but also the potential for more volatility.

When it kicks in – January 1, 2008

Key things to note – The interest rate for the OA will continue to be guaranteed 2.5 per cent.

The government will grant, as a buffer, a two-year period whereby the SMRA rate is fixed at floor rate of 4 per cent.

After this transition period, the floor rate of 2.5 per cent will still hold. That means that even if the bond rate falls below 1.5 per cent, the rate you will get from the SMRA is fixed at the OA rate of 2.5 per cent.

Compulsory Annuities and Life-Long Pay-out
What it is – All CPF members aged 50 and below must, using a small portion of their CPF minimum sum, buy an annuity when they turn 55.

What this means to you – Premiums to the annuity – also dubbed longevity insurance – goes into a general pool. When you reach 85 years old, you will receive a monthly pay-out of about $250 to $300 until you die. The downside to this – if you pass away before 85 years old, your family will not see the money.

When it kicks in – This compulsory annuity proposal drew the most debate among the three key CPF changes. To address the concerns, the government has setup a committee to study public and professional views for this National Longevity Insurance Scheme. The committee will make recommendations to offer CPF members flexibility and options, such as the possibility of earlier annuity payouts at age 75, instead of 85. The report is expected to be ready in the first quarter of 2008.