Tuesday, August 21, 2007

CPF Changes

Updated: Annuities

I never knew that National Day Rally can be so confusing.

First these CPF changes were announced on Sunday:
  • CPF raising interest rates by 1% across the board.
  • Applicable to only first $20,000 in the OA, and $60,000 (inclusive of the OA) of all the accounts combined. The rest of the money will have interest based on the current rates.
  • The $60,000 will be "locked-in". Meaning you will not be able to use that amount of money to invest in other securities.
  • People below 50 years of age as of this year will need to compulsory buy an annuity upon "retirement".
  • Retirement age raised to 65 years old.

Thoughts after hearing this:
  • Interest rate of 3.5% for my OA, and 5% for my other accounts. If I exceed, I get the old interest rates. Not bad... I don't mind putting my money inside.
  • $60,000 locked in?? What do they mean by locking in? Does that mean once locked, it cannot be unlocked? Does that mean if someone just make 1 transaction to invest a small amount, the whole $60,000 will not get the additional 1%?
  • No details on the annuity so I reserve my comments and thoughts.

Latest news today:
  • Interest rates for SA/MA/RA will be pegged to long-term bond rate instead of a flat rate of OA + 1.5%.
  • Buying of annuity will only take a small portion of the minimum sum. This annuity will only start paying out after 85 years old.
  • The additional 1% of interest given will be credited to the special account

Thoughts today:
  • Totally confused. Now they are "modifying" the news.
  • The long term bond rate for Singapore bonds is only around 3.5%. That means that if they peg it, effectively they are reducing the default interest rates for the SA/MA/RA. This is a very big thing, and it should be announced together with the changes.
  • With the addition of 1% for the first $60,000, that means the government is effectively removing some interest from the "rich", and giving it to the "poor". Smart move...
  • From the latest news of the annuity, that means the retirement funds will be partly cash from the account, and partly returns from the annuity. that means a portion of the CPF will be used to invest in an annuity that will only give returns after 85 years old (estimated about $250-$300). Therefore, if you live longer than expected, you will still get a certain amount per month to "tide" you over. However, that means lower returns from your retirement funds from 65 years old to 85 years old.
  • The additional 1% credited to SA instead is something I still could not understand. Does that mean all the extra 1% interest generated from all the accounts will be credited to the SA only? Not clear...

Considering that the main details will only come out next month, I guess I'll reserve my "final" thoughts. All in all, apart from the confusion, the changes to the CPF is quite okay. It's budget friendly, and yet help the lower income earners. Although the "retirement age" has been lifted to 65, all in all, I would think by 65, I'll still be alive and kicking. :D

The annuity part needs a bit more digestion. I would very much prefer if it works hand-in-hand with the payout from 65 years old. It will erase the concern that the annuity is "wasted" for those who thinks that they will not live till 85 years old.

The rich will of course not like the changes. :p

Will come back to this topic when there are more news. Confusion...

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