Saturday, August 25, 2007

Summary of CPF Changes

Updated on 18th Sept 2007 based on the latest news
Updated on 2nd Oct 2007 based on link provided by choozm
Updated on 8th Oct 2007 on CPF RSP Investments
Updated on 16th Oct 2007 on CPF ILP Single Premium Invstments
Updated on 1st Nov 2007 on CPF bank charges for present investments
Updated on 16 Feb 2008 on CPF annuity

Thought I would like to summarize the CPF changes since the "surprises" seem to have died down.

First and foremost, CPF interest rates will increase by 1% for the first $60,000 in all your CPF accounts. Meaning CPF ordinary account (CPF-OA) will have an additional 1% interest for the first $20,000, while the remaining $40,000 in your other CPF accounts will have an additional 1% interest. Note that the additional 1% interest in the CPF-OA account for all the accounts will be credited to your special account/retirement account. The housing loan will still be pegged to the original CPF-OA interest rate (2.5%) + 0.1%, as the extra 1% is considered as a bonus, and not the actual rate.

For those who invest their money using their CPF or has Recurring Single Premium Investment-Linked plans (ILP), the first $20,000 (max) from your CPF-OA, and the first $20,000 (max) from your SA account will be "locked-in". Meaning that now we have another layer of "minimum sum" in our accounts, in terms of investment needs. Existing housing, CPF insurance (includes regular premium ILP) and educational schemes will not be affected by the lock-in. Giving an example, if you have $20,000 in your OA, the lock-in will be for the $20,000 in your OA, $20,000 in your SA. If you have $10,000 in your OA, the lock-in will be for $10,000 in your OA, and $20,000 in your SA. The restriction for the lock-in will kick in 1 April 2008. Those who has already invested will not be affected. However, new RSPs in the CPF accounts will be affected, and subjected to the caps. Meaning if you do not have $20,000 in your OA/SA, you will not be allowed to RSP. The other rules will still apply, and it'll be applied on the actual amount in your accounts. For e.g., stocks restriction will include the $20,000 lock-in amount, and the charges (e.g. agent bank charges) for maintaining the present (not new) investments can still be drawn from your OA regardless of the lock-in.

The special account, retirement account and medisave account (CPF-SA, CPF-RA, CPF-MA) interest rates will no longer be pegged to CPF-OA interest rate + 1.5% (4%). Instead, the pegging will be to the government 10yr bond rate + 1%. Guess what's the rate currently? 3.3%! Average rate is around 3.5%. For e.g., for your first $40,000 in your CPF-SA+CPF-RA+CPF-MA, you will get 3.3%+1% interest rate. The rest of the money in those accounts will only get 3.3%. The current 10 yr bond rate is now around 2.9%. Therefore, the interest will be 3.9%. The government will guarantee a floor of 4% for 2 years (2008,2009). After which, there will be a floor of 2.5% for all the accounts. The CPF interest formula will be reviewed again 5 years later.

Upon reaching 55 years old, your minimum sum now will be divided into 2 portions. 1 portion will still be the sum of money which you will draw down later. A small portion of it will now be used to buy an annuity. An annuity is an insurance product designed to pay you a monthly sum as long as you live. However, the catch is that this payout from the annuity will only come when you reach 85 years old. Estimated payout will be $250-$300 per month. Therefore, you will have to expect a lower CPF monthly payout from your retirement funds because a portion of your retirements funds have been used to buy an annuity, which will not payout until 85 years old.I expect more news on this aspect because these changes are extremely unattractive as of now. Contrary to statistics, not many people can live till 85 years old, and not many people will want to live till that age, especially with the amount of stress we're having here. Please refer to this post for the annuity portion.

The official retirement age will stay at 62 years old. Instead, the government will pass a law stating that the company should re-hire the older workers (re-design the jobs) until 65 years old (year on year renewal) if conditions permit. Therefore, you can only draw down your money from the CPF accounts upon 65 years old. No longer 62 years old. This will take effect from 2012 onwards. They will phase in the changes every 2 years. Meaning 63 years old in 2013, 64 years old in 2016, and 65 years old in 2019. This will gradually be shifted to 67 years old. That means if you're not 62 years old with effect from the change, you're affected by these changes. Those affected directly will get a one-off bonus by the government. Those who are not affected, but voluntarily delay their draw-down age to 65 years old, will also get something from the government. More news will be out on this aspect later.

The deferment bonus will be based on the first $30,000 from your retirement account. Age 50-51: 3%, Age 52-53: 4%, Age 54-57: 5%. Those above 55 years old will receive the bonus on May 2008. The rest will get it upon reaching 55 years old.

The voluntary deferment bonus will also be based on the first $30,000 from your retirement account. It will be 2% bonus for each year of deferment from 62 until age 65. Age 54-55: 2%, Age 56-57: 2% x 2years, Age 58-61: 2% x 3years, Age 62: 2% x 2 years, Age 63: 2%.

In a nutshell, these are the proposed changes to the CPF. The nitty gritty details will be out in September (next month), and it should take effect by 1 Jan 2008. For the layman though, the changes are quite confusing.

The full ministerial statement of all the changes can be found here.

1 comment:

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