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How to get 100%, every cent of your money from your CPF account? Easy.
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CPF Minimum Sum
Should it be pledged on equal basis, 50% cash and 50% property, when the value of cash and property could not be the same from one year to another or 10 years later, etc?
What is the solution?
========
CPF Minimum Sum:
The MSS started in 1987 was set at $30,000. It was revised to $40,000 in July 1995 with at least $4000 in cash [10%] and the remaining 90% with pledged property.
The MSS was revised in 2003 to $80,000 with $40,000 or 50% required to be set aside in cash, and the remaining 50% with pledged property.
This 50/50 ratio has remained unchanged up till now. The MSS was $148,000 in 2013, and it was increased by $7,000 to $155,000 wef 1 July 2014.
The CPF Board should address the following:
1] Should the cash vs pledged property continue to be set at 50/50?
2] The 50/50 basis was set in 2003 when the MSS was $80,000. Today, the S$ and property prices have not remained constant at the same ratio of 50/50.
3] For argument sake, and with the MSS now at $155,000 [$77,500 in cash and $77,500 in pledge property], if the property price has gone up in resale value from $100,000 [prior to 2003] to $200,000 [now], a 50% pledge of the property would be $100,000, and not $77,500. This is $22,500 more in property value. Should the cash pledge be reduced from $77,500 by $22,500 to $55,000? The CPF Board should allow the $22,500 to be withdrawn at age 65.
4] The concern of asset rich but cash poor at retirement should be addressed. Is it politically tenable to continue to increase the MSS and keep the cash and pledged property at the ration of 50/50? Adjusting the 50/50 ratio according to the enhanced property value based on the property resale market price would encourage more property ownership. When more owners look after their estate and property well, it will enhance their retirement CPF nest egg through property value appreciation.
Property ownership is the key pillar in the CPF scheme and it should not be easily overlooked when setting the ratio of cash vs pledgef property value.
5] It is noted that with more cash kept in the Retirement Account, it will mean a higher annual annuity monthly payment. But with a property pledged that has a higher resale value, the concern of a low annuity cash monthly payment must take this property factor into account to reduce the cash pledged quantum. .
=========
The 14 questions in Parliament on the CPF issue.
======
I copy paste the ST article for those who do not have access to ST Online: “5 CPF myths busted” Published on Jul 9, 2014 in ST By Janice Heng
Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam and Manpower Minister Tan Chuan-Jin tackled some common myths and misconceptions about the Central Provident Fund system during Tuesday’s Parliament session.
MYTH NO. 1 – Your Minimum Sum keeps going up
Once the Minimum Sum is set for a particular cohort, it does not change. Rather, it has been going up for each new cohort. For example, someone who turns 55 between July 2014 and June 2015 will need to set aside $155,000. This is more than for the previous cohort, which had to set aside $148,000, but this older cohort’s own Minimum Sum has not gone up. Similarly, for someone who turned 55 five years ago, the Minimum Sum was $117,000 and has not changed. The Minimum Sum has been rising from cohort to cohort over the last decade in order to catch up with what a lower-middle income household would need in their retirement years, taking inflation into account.
MYTH NO. 2 – If you don’t meet the Minimum Sum, you must top up the difference
If you do not meet your Minimum Sum at age 55, you do not need to top up the shortfall in cash. Nor do you need to sell your property to make up the shortfall. Having less than the Minimum Sum in your CPF account just means that you will receive smaller monthly payouts when you reach the draw-down age of 65.
MYTH NO. 3 – The Minimum Sum must be set aside fully in cash
Only half of the Minimum Sum needs to be set aside in cash. Ordinary Account savings above that amount can be used to finance housing purchases, or be withdrawn if you pledge your property. This means that a member turning 55 this year only needs to set aside $77,500 in cash. The rest can be withdrawn if they pledge their property. This cash amount of $77,500 will translate to a CPF Life payout of about $600 per month in retirement.
MYTH NO. 4 – CPF monies are managed by Temasek Holdings
Temasek Holdings does not manage any CPF monies. CPF members’ savings are invested in Special Singapore Government Securities. These are special non-tradable bonds issued by the Government to the CPF Board. The Government takes the proceeds from issuing these bonds, and pools them together with other funds, such as proceeds from the tradable Singapore Government Securities, government surpluses and proceeds from land sales. These pooled funds are first deposited with the Monetary Authority of Singapore as government deposits. MAS converts these funds into foreign assets through the foreign exchange market. But a major portion of these assets are of a longer term nature, and are hence transferred to be managed by GIC. As shown above, no funds from the CPF are passed to Temasek for management.
MYTH NO. 5 – GIC should manage the CPF monies separately
If the GIC had to manage a separate fund to provide backing for CPF liabilities, it would not be able to earn as much. CPF monies are pooled with the Government’s other assets. Because the Government has built up significant net assets – that is, what it owns minus what it owes – including unencumbered assets, which are surpluses from land sales proceeds, government surpluses, and investment returns from those proceeds, these can act as a buffer. When the market is weak and GIC’s returns fall below the CPF interest rates, the Government can still pay the interest on CPF monies thanks to the net assets. By pooling CPF monies with all these other assets, it also lets the GIC aim for higher long-term returns by investing in riskier assets such as equities and real estate. It can take losses when the markets are down, with the knowledge that it stands to gain when the markets go up again later. A standalone fund for CPF monies would have to be managed much more conservatively, to avoid the risk of not meeting CPF obligations. Instead of accepting risks that allow for good long-term returns, the fund would just aim to avoid short-term shortfalls.
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“No Reason to doubt CPF’s intentions”
http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid=1001786068-20230-490686297
The Business Times © Singapore Press Holdings Limited. Reproduced with permission by Christopher Tan, dated 11 June 2014
To understand the CPF, we must understand that its primary purpose is to help us meet our basic retirement needs. It is on this premise that the scheme was built upon and it is from this perspective that we must look from. All other uses of CPF monies are meant to support this purpose. Therefore, rules are set such that if you use your CPF monies for housing, children’s education, insurance, paying medical expenses and investments, they must either help you in your retirement or not affect your retirement.
An example would be if you use your Ordinary Account (OA) monies to fund your children’s education at one of the local universities or polytechnics. One year after they leave the course, your children have the obligation to pay back the money plus interest not earned by their parents in their OA.
Another example will be, if you want to top up say, your parents’ CPF account using your own CPF monies, you can’t do it unless you have met your own minimum sum as CPF is meant for your own retirement, not your kids’ education, nor someone else’s retirement. In the same vein, if you sell your property that was funded by CPF for the purchase, you need to put back the amount you have used plus the accrued interest not earned (if you had kept it in the OA), back into your OA.
It is not that you are paying interest for your own money, but rather, this is to be sure that your retirement money is there when you need it. For this purpose, the CPF Board was started on July 1, 1955. Life was hard then and the government at that time feared that our forefathers might not have the knowledge and ability to save for their retirement.
CPF became a form of forced savings for them. When Singapore was forced to leave Malaysia and became independent in 1965, we were struggling to survive and many needs arose. The government implemented schemes to meet those needs, such as Public Housing (1968), Medisave (1984), the Minimum Sum (1987), Medishield (1990), CPF Investment (1997) and CPF Life (2008), while keeping the primary purpose of the CPF in mind.
Minimum Sum Scheme (MSS, 1987)
Each year, at the end of the Chinese New Year season, my children always excitedly count how much money they have collected in their angpows (red packets) and plan for the things they want to buy. This is when my wife steps in, takes a portion of the money and “force saves” it on the children’s behalf, in their bank accounts.
The children are left with some money to spend, usually on unnecessary things. Are they happy? Never. But we know that they will grow up seeing a pretty decent sum in their account, and knowing that their parents always have their welfare in mind. The MSS works on this same principle.
At age 55, before one can take all their CPF monies (and we have heard stories of how people use it up very quickly on unnecessary things), the CPF board will take a portion of it (known as the Minimum Sum or MS) and deposit it into their Retirement Account (RA).
At age 62 (previous draw down age or DDA), the retirees get a monthly annuity till about age 82. However, with Singaporeans now living longer beyond 85 years old, the old MSS became dated. CPF Life was therefore launched to bridge this gap.
CPF Life (2008)
The objective of CPF Life is simple. To give a retiree a lifelong income stream till his death, the CPF Board made two changes to the old MSS:
- Take a portion of monies in the RA and pool it with other members to form an “insurance annuity” fund
- Extend the DDA to age 65.
As a result, based on the new MS of $155,000 in July 2014, a couple contributing this amount to their own RA will have about $2,400 per month till their demise. If they die early, the unused portion of their monies will be given back to their beneficiaries.
The hottest debate now
Allow me to share with you a parable.
Two men, Peter and John, struck an agreement with each other. Peter will lend to John $100,000 on the understanding that John will pay Peter a guaranteed 4 per cent per annum with no risk of losing the capital. The deal was done and John took the $100,000 he borrowed from Peter and invested it.
At the end of the year, John made 7 per cent from his own investments and as agreed, paid Peter 4 per cent. Peter became angry with John and insisted that John pay him more, since he had made more with his money. Although this was not the original agreement, John was prepared to change the agreement, but told Peter that in the same way, if he loses money in his investments, in the future, Peter must be prepared to get lesser than 4 per cent or even suffer a capital loss.
Peter was very angry. He scolded John for not being trustworthy as getting a guaranteed 4 per cent per annum with no capital loss was what they had agreed on.
By now, you will understand that I am referring to the interest rates we are getting from our CPF accounts. Our CPF is invested into special issues of Singapore Government Securities (SGS) – otherwise known as Singapore Government Bonds – as they are rated AAA and deemed very safe. These bonds are issued specifically to the Board to meet its interest and other obligations.
They do not have quoted market values and the Board cannot trade them in the market. The CPF Board currently guarantees that we will get a minimum return of 2.5 per cent per annum for the OA and 4 per cent per annum for the Special Account (SA), Medisave Account (MA) and RA. OA interest is lower because the OA is, in essence, no different from a special-purpose demand deposit – savings are withdrawable on demand primarily for housing.
By investing it in Special SGS, we are effectively lending our monies to the Singapore government for a guaranteed 2.5 per cent per annum to 4 per cent per annum with very low risk. If the monies are subsequently invested by our government and reaped higher returns, I do not think it is fair for us to demand a higher return for our CPF monies because we cannot ask for a higher return without taking on higher risk.
But what if one wants to take higher risk and get higher than CPF returns? There is the CPF Investment Scheme (CPFIS), which allows one to invest his CPF on his own. Why doesn’t the CPF Board invest it on our behalf? Because the primary purpose of the CPF is to help us meet our basic retirement needs and therefore the investment objective should be one of capital preservation rather than growth.
Over the past two weeks, plenty of numbers and statistics have been brought up to discredit the CPF and its custodian.
But let’s not lose sight of its purpose. It is not that numbers are not important. They are, but they exist to serve a purpose, and must be discussed in that context. We can continue to debate on how the current CPF should be improved, but we should never cast doubts on its intentions.
The writer is the CEO of Providend Ltd, a fee-only independent financial advisory firm
CPF Minimum Sum
Should it be pledged on equal basis, 50% cash and 50% property, when the value of cash and property could not be the same from one year to another or 10 years later, etc?
What is the solution?
========
CPF Minimum Sum:
The MSS started in 1987 was set at $30,000. It was revised to $40,000 in July 1995 with at least $4000 in cash [10%] and the remaining 90% with pledged property.
The MSS was revised in 2003 to $80,000 with $40,000 or 50% required to be set aside in cash, and the remaining 50% with pledged property.
This 50/50 ratio has remained unchanged up till now. The MSS was $148,000 in 2013, and it was increased by $7,000 to $155,000 wef 1 July 2014.
The CPF Board should address the following:
1] Should the cash vs pledged property continue to be set at 50/50?
2] The 50/50 basis was set in 2003 when the MSS was $80,000. Today, the S$ and property prices have not remained constant at the same ratio of 50/50.
3] For argument sake, and with the MSS now at $155,000 [$77,500 in cash and $77,500 in pledge property], if the property price has gone up in resale value from $100,000 [prior to 2003] to $200,000 [now], a 50% pledge of the property would be $100,000, and not $77,500. This is $22,500 more in property value. Should the cash pledge be reduced from $77,500 by $22,500 to $55,000? The CPF Board should allow the $22,500 to be withdrawn at age 65.
4] The concern of asset rich but cash poor at retirement should be addressed. Is it politically tenable to continue to increase the MSS and keep the cash and pledged property at the ration of 50/50? Adjusting the 50/50 ratio according to the enhanced property value based on the property resale market price would encourage more property ownership. When more owners look after their estate and property well, it will enhance their retirement CPF nest egg through property value appreciation.
Property ownership is the key pillar in the CPF scheme and it should not be easily overlooked when setting the ratio of cash vs pledgef property value.
5] It is noted that with more cash kept in the Retirement Account, it will mean a higher annual annuity monthly payment. But with a property pledged that has a higher resale value, the concern of a low annuity cash monthly payment must take this property factor into account to reduce the cash pledged quantum. .
=========
The 14 questions in Parliament on the CPF issue.
======
I copy paste the ST article for those who do not have access to ST Online: “5 CPF myths busted” Published on Jul 9, 2014 in ST By Janice Heng
Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam and Manpower Minister Tan Chuan-Jin tackled some common myths and misconceptions about the Central Provident Fund system during Tuesday’s Parliament session.
MYTH NO. 1 – Your Minimum Sum keeps going up
Once the Minimum Sum is set for a particular cohort, it does not change. Rather, it has been going up for each new cohort. For example, someone who turns 55 between July 2014 and June 2015 will need to set aside $155,000. This is more than for the previous cohort, which had to set aside $148,000, but this older cohort’s own Minimum Sum has not gone up. Similarly, for someone who turned 55 five years ago, the Minimum Sum was $117,000 and has not changed. The Minimum Sum has been rising from cohort to cohort over the last decade in order to catch up with what a lower-middle income household would need in their retirement years, taking inflation into account.
MYTH NO. 2 – If you don’t meet the Minimum Sum, you must top up the difference
If you do not meet your Minimum Sum at age 55, you do not need to top up the shortfall in cash. Nor do you need to sell your property to make up the shortfall. Having less than the Minimum Sum in your CPF account just means that you will receive smaller monthly payouts when you reach the draw-down age of 65.
MYTH NO. 3 – The Minimum Sum must be set aside fully in cash
Only half of the Minimum Sum needs to be set aside in cash. Ordinary Account savings above that amount can be used to finance housing purchases, or be withdrawn if you pledge your property. This means that a member turning 55 this year only needs to set aside $77,500 in cash. The rest can be withdrawn if they pledge their property. This cash amount of $77,500 will translate to a CPF Life payout of about $600 per month in retirement.
MYTH NO. 4 – CPF monies are managed by Temasek Holdings
Temasek Holdings does not manage any CPF monies. CPF members’ savings are invested in Special Singapore Government Securities. These are special non-tradable bonds issued by the Government to the CPF Board. The Government takes the proceeds from issuing these bonds, and pools them together with other funds, such as proceeds from the tradable Singapore Government Securities, government surpluses and proceeds from land sales. These pooled funds are first deposited with the Monetary Authority of Singapore as government deposits. MAS converts these funds into foreign assets through the foreign exchange market. But a major portion of these assets are of a longer term nature, and are hence transferred to be managed by GIC. As shown above, no funds from the CPF are passed to Temasek for management.
MYTH NO. 5 – GIC should manage the CPF monies separately
If the GIC had to manage a separate fund to provide backing for CPF liabilities, it would not be able to earn as much. CPF monies are pooled with the Government’s other assets. Because the Government has built up significant net assets – that is, what it owns minus what it owes – including unencumbered assets, which are surpluses from land sales proceeds, government surpluses, and investment returns from those proceeds, these can act as a buffer. When the market is weak and GIC’s returns fall below the CPF interest rates, the Government can still pay the interest on CPF monies thanks to the net assets. By pooling CPF monies with all these other assets, it also lets the GIC aim for higher long-term returns by investing in riskier assets such as equities and real estate. It can take losses when the markets are down, with the knowledge that it stands to gain when the markets go up again later. A standalone fund for CPF monies would have to be managed much more conservatively, to avoid the risk of not meeting CPF obligations. Instead of accepting risks that allow for good long-term returns, the fund would just aim to avoid short-term shortfalls.
==========
“No Reason to doubt CPF’s intentions”
http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid=1001786068-20230-490686297
The Business Times © Singapore Press Holdings Limited. Reproduced with permission by Christopher Tan, dated 11 June 2014
To understand the CPF, we must understand that its primary purpose is to help us meet our basic retirement needs. It is on this premise that the scheme was built upon and it is from this perspective that we must look from. All other uses of CPF monies are meant to support this purpose. Therefore, rules are set such that if you use your CPF monies for housing, children’s education, insurance, paying medical expenses and investments, they must either help you in your retirement or not affect your retirement.
An example would be if you use your Ordinary Account (OA) monies to fund your children’s education at one of the local universities or polytechnics. One year after they leave the course, your children have the obligation to pay back the money plus interest not earned by their parents in their OA.
Another example will be, if you want to top up say, your parents’ CPF account using your own CPF monies, you can’t do it unless you have met your own minimum sum as CPF is meant for your own retirement, not your kids’ education, nor someone else’s retirement. In the same vein, if you sell your property that was funded by CPF for the purchase, you need to put back the amount you have used plus the accrued interest not earned (if you had kept it in the OA), back into your OA.
It is not that you are paying interest for your own money, but rather, this is to be sure that your retirement money is there when you need it. For this purpose, the CPF Board was started on July 1, 1955. Life was hard then and the government at that time feared that our forefathers might not have the knowledge and ability to save for their retirement.
CPF became a form of forced savings for them. When Singapore was forced to leave Malaysia and became independent in 1965, we were struggling to survive and many needs arose. The government implemented schemes to meet those needs, such as Public Housing (1968), Medisave (1984), the Minimum Sum (1987), Medishield (1990), CPF Investment (1997) and CPF Life (2008), while keeping the primary purpose of the CPF in mind.
Minimum Sum Scheme (MSS, 1987)
Each year, at the end of the Chinese New Year season, my children always excitedly count how much money they have collected in their angpows (red packets) and plan for the things they want to buy. This is when my wife steps in, takes a portion of the money and “force saves” it on the children’s behalf, in their bank accounts.
The children are left with some money to spend, usually on unnecessary things. Are they happy? Never. But we know that they will grow up seeing a pretty decent sum in their account, and knowing that their parents always have their welfare in mind. The MSS works on this same principle.
At age 55, before one can take all their CPF monies (and we have heard stories of how people use it up very quickly on unnecessary things), the CPF board will take a portion of it (known as the Minimum Sum or MS) and deposit it into their Retirement Account (RA).
At age 62 (previous draw down age or DDA), the retirees get a monthly annuity till about age 82. However, with Singaporeans now living longer beyond 85 years old, the old MSS became dated. CPF Life was therefore launched to bridge this gap.
CPF Life (2008)
The objective of CPF Life is simple. To give a retiree a lifelong income stream till his death, the CPF Board made two changes to the old MSS:
- Take a portion of monies in the RA and pool it with other members to form an “insurance annuity” fund
- Extend the DDA to age 65.
As a result, based on the new MS of $155,000 in July 2014, a couple contributing this amount to their own RA will have about $2,400 per month till their demise. If they die early, the unused portion of their monies will be given back to their beneficiaries.
The hottest debate now
Allow me to share with you a parable.
Two men, Peter and John, struck an agreement with each other. Peter will lend to John $100,000 on the understanding that John will pay Peter a guaranteed 4 per cent per annum with no risk of losing the capital. The deal was done and John took the $100,000 he borrowed from Peter and invested it.
At the end of the year, John made 7 per cent from his own investments and as agreed, paid Peter 4 per cent. Peter became angry with John and insisted that John pay him more, since he had made more with his money. Although this was not the original agreement, John was prepared to change the agreement, but told Peter that in the same way, if he loses money in his investments, in the future, Peter must be prepared to get lesser than 4 per cent or even suffer a capital loss.
Peter was very angry. He scolded John for not being trustworthy as getting a guaranteed 4 per cent per annum with no capital loss was what they had agreed on.
By now, you will understand that I am referring to the interest rates we are getting from our CPF accounts. Our CPF is invested into special issues of Singapore Government Securities (SGS) – otherwise known as Singapore Government Bonds – as they are rated AAA and deemed very safe. These bonds are issued specifically to the Board to meet its interest and other obligations.
They do not have quoted market values and the Board cannot trade them in the market. The CPF Board currently guarantees that we will get a minimum return of 2.5 per cent per annum for the OA and 4 per cent per annum for the Special Account (SA), Medisave Account (MA) and RA. OA interest is lower because the OA is, in essence, no different from a special-purpose demand deposit – savings are withdrawable on demand primarily for housing.
By investing it in Special SGS, we are effectively lending our monies to the Singapore government for a guaranteed 2.5 per cent per annum to 4 per cent per annum with very low risk. If the monies are subsequently invested by our government and reaped higher returns, I do not think it is fair for us to demand a higher return for our CPF monies because we cannot ask for a higher return without taking on higher risk.
But what if one wants to take higher risk and get higher than CPF returns? There is the CPF Investment Scheme (CPFIS), which allows one to invest his CPF on his own. Why doesn’t the CPF Board invest it on our behalf? Because the primary purpose of the CPF is to help us meet our basic retirement needs and therefore the investment objective should be one of capital preservation rather than growth.
Over the past two weeks, plenty of numbers and statistics have been brought up to discredit the CPF and its custodian.
But let’s not lose sight of its purpose. It is not that numbers are not important. They are, but they exist to serve a purpose, and must be discussed in that context. We can continue to debate on how the current CPF should be improved, but we should never cast doubts on its intentions.
The writer is the CEO of Providend Ltd, a fee-only independent financial advisory firm
tankoktim 