Not that many countries have a government-linked pension, superannuation or national health programme – we are lucky to live in one of them. If you’re a PR or Singapore Citizen, you’ll be entitled to both CPF and Medisave. Avriowealth gives us a quick introduction and explanation of how CPF works and why it’s important to make both CPF and Medisave work for you.
How CPF works
The Central Provident Fund (CPF) is a social security system that helps Singaporeans and permanent residents set aside savings for retirement. CPF savings can also be used for housing, healthcare, insurance as well as certain investments. Both employers and employees make monthly CPF contributions.
The interest earned on CPF accounts is between 2.5% to 4% per year, with extra interest on the first $60,000 of your combined balances (capped at $20,000 for Ordinary Account (OA)) for 2020.
Within a financial plan, CPF can be earmarked as a down payment for a house, as part of the fixed income component of an asset allocation, as a pension for retirement or to help offset the costs of medical care before and during retirement.
Why CPF is important
CPF may be optimised for tax planning, an important part of financial planning for Singaporeans and PRs alike. Strategies to consider include the Retirement Sum Topping-up (RSTU) scheme, or rebalancing accounts between your spouses.
Are you a US taxpayer? CPF isn’t a qualified pension per the IRS; it requires annual US tax reporting. The employer’s contribution to CPF is included in annual income while the employee’s contribution is not eligible for the foreign earned income exclusion and interest earned is reported on Schedule B. Additionally, CPF needs to be reported on your FBAR – and possibly IRS form 8938, depending upon your personal circumstances.
How to use CPF well
To help you achieve your retirement goals, one strategy may be to move funds from OA to SA to increase the rate of interest earned. Consideration has to be given to the fact that, once funds are moved into an SA account, they’re not available to fund other financial goals such as a property purchase.
While dipping into your OA account to buy property seems tempting, you may be better off using your other funds, if available, as your down payment and monthly payments. OA earns 2.5%; funds in bank accounts earn close to zero and traditional bank loans are available for around 1.5%. Using funds that pay you the highest interest rate may not be the best option – if you have a choice. By using both CPF and bank financing, you have increased your overall borrowing costs because you have to return the funds to CPF with interest and you are paying a mortgage.
Additionally, when you withdraw funds from CPF, you lose the power of compounding – earning interest on interest.
Medisave considerations
Medisave can be used to offset your out-of-pocket healthcare costs, before and during retirement. Understanding how much is available for healthcare is an integral part of your financial plan.
CPF is a wonderful tool to help Singaporeans and permanent residents achieve their financial goals, but it’s important to seek advice from your CFP professional or other trusted advisors.
For information on how you can optimise CPF, contact Michael Borchert, CFP from Avrio Wealth at mborchert@avriowealth.com.
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