One of my most embarrassing moments? Not having cash on hand to pay for a cab. Their NETS machine couldn’t read my card and there was no way I was going to pay the credit card surcharge. I know how important it is to always have cash on hand. Which is probably why you’re going to think I’m crazy to suggest that you should contribute voluntarily to your CPF account. That’s right, I’m saying you should take the cash you have on hand and lock them away till you’re 55. But of course, I’m not saying that this is the right option for everyone. However, if you fall into one of these three categories, you might want to consider contributing to your CPF account.
1. Singaporeans who want to enjoy higher CPF LIFE payouts
There’s only one main reason why your CPF account exists. No, I’m not a conspiracy theorist. CPF exists to ensure that you are sufficiently provided for in your retirement. With the introduction of CPF LIFE, you’re now assured of a monthly payout for as long as you live. However, the amount you receive each month will be determined by how much you have in your CPF Retirement Account.
With interest rates of up to 3.5% per annum for your CPF Ordinary Account, and up to 5% for Special, Medisave and Retirement Accounts, it’s one of the best principal-protected options in the market right now.
Thus, if you only have $80,500 in your CPF account at age 55 this year, you can expect to get a monthly payout of $660 to $720 each month from CPF LIFE when you turn 65. However, if you top-up more of your savings into your CPF account, up to $241,500 at age 55, you can expect a monthly payout of $1,770 to $1,920 from CPF LIFE once you turn 65.
Chey… just get more monthly payout? Thought what…
Actually, there’s more! Topping up your CPF account voluntarily also makes you eligible for tax relief of up to $7,000 per calendar year. This means that for every dollar you top up you can claim a dollar of tax relief, up to $7,000 per calendar year. Say if you’re being taxed on a yearly income of $85,000 a year, after all the other reliefs have been calculated.
You will need to pay about $3,925. However, if you go for the maximum tax relief of $7,000, then you’ll only be taxed on $78,000 a year, for a payment of $3,210. That’s $715 less tax you pay, just by topping up your own CPF by $7,000 a year.
You can also get tax relief from topping up the CPF accounts of your family members! In fact, topping up your loved one’s CPF accounts may be better than giving them cash.
2. Singaporeans who are self-employed
Maybe you’re the creative type, who offers your services to multiple clients at a time. Or perhaps you don’t like the idea of working under some horrible boss and just want to do your own thing. Whatever your reasons for being self-employed, you now have a decision to make – should you contribute to your CPF account?
Remember, because you’re self-employed, you are probably required to contribute to your Medisave account. But why would you want to put your hard earned money into your CPF account, where its usage will be restricted?
The main question you’ll want to ask yourself is what kind of retirement lifestyle you plan to have. If what you’re doing is a labour of love and you think it can continue earning you an income for the rest of your life, then you might not see the need to set aside retirement savings.
However, I dare say that for most self-employed people, the fact that you aren’t forced to set aside money for retirement may create the illusion that you’ve got more money to spend. Unless you’re are disciplined enough to put it aside in a good savings or investment plan, you may find yourself with no retirement fund.
Unlike CPF, however, these plans are seldom principal protected, and so there’s no assurance that you won’t lose your hard earned money anyway.
So if you can’t or won’t set aside the time and effort to invest your money, then perhaps CPF is your best bet.
3. Singaporeans who are based overseas
If you’re working overseas, you and your employer do not have to pay CPF contributions. That’s great right? Only if you’re planning to retire overseas, I guess.
However, if you’re ever planning to come back to Singapore later in life, you might find yourself without a financial safety net since you don’t have money in your CPF account.
Just like the self-employed Singaporeans, those working overseas might want to consider topping up their CPF voluntarily in order to ensure that they are able to receive some income during their retirement years.
Do you know of any other types of Singaporeans who would benefit from voluntary CPF contributions? Let us know.