I’ve been reading a number of blog posts by AK71 on whether we should be accelerating the topping up process or transferring the money from the Ordinary Account (OA) to a Special Account (SA) which obviously yield direct advantage as the money is compounded in higher return. He also talked about this in the previous “meet the readers” session which prompted me to think about this issue.
If you have been reading my blog from the start, you’ve noticed that I seldom discussed anything regarding the social security (CPF) scheme we have in Singapore for financial planning purpose. For years I have not kept a passive interest in the subject matter and only recently I started to take more notice of it.
Anyway, I have been recently pondering on whether I should top up my special account with some of of my liquid cash right now which could give me two advantages at once.
The first advantage is the top up relief deduction of up to $7,000 against my chargeable income for my income tax next year for YA 2016. I understand that it’s still early days but I like to plan ahead. The Singapore progressive tax rate has always been very welcoming in the sense that they are structured favorably low compared to other countries so no any genuine complaints coming from me. Even so, my earned income has been increasing over the years so it’s about time I did something to trim the absolute tax amount down a little bit to my advantage.
The second advantage is the relatively attractive high rate of 4% the Special Account is currently offering which will then be compounded over time until I turn 55 to meet the required Minimum Sum (MS). The thing about starting early is the advantage of compounding can work its magic that allows people like us to meet the required MS as soon as possible.
Many people have complained regarding the ever increasing MS required but to be honest, the faster you reach those figure, the harder the compounding effect is going to work for you that will cover the incremental difference over time. At least, that’s what I think.
Final Thoughts
It struck to me when I started out the path to this financial freedom journey that I was never going to be dependent upon the social security scheme for an alternative income, which is the reason why I have not been paying too much attention on the issues all along. After all, the goal to reach financial freedom was never going to include any contributions from the social security scheme so I am seeing that as a bonus for my case.
I guess that this is something which I have been learning from peer bloggers and friends over time that this is after all our money which I needed to take care of. Too many people are taking the scheme for granted, though I would agree that there seems to be a couple of grey areas about the scheme which causes resentments amongst the members around.
In any case, that’s done and over with and that’s $7k liquid cash gone away from my war chest for the moment. I’ll be looking to explore the possible areas for improvement to accelerate the compounding effect but we’ll see how it goes for next year.
I only did it once contrary to the common wisdom as advised by many investment bloggers and advisers.
Hi Uncle CW
Care to share the reason why you only did it once?
Can we as "savvy" investment bloggers beat 4% CAGR when the market present its rare opportunity?
Most of us can. Right?
In investing, our account size really matters. A larger war chest may help us to stretch our fund longer to run farther along with the bear.
Every $7K count. Now with 100 shares lot, it is even better with every $7K. We, small retail investors can now stretch it farther.
🙂
Ahh now I understand what you meant. The idea behind beating the 4% return over the long run 🙂
I know it's a 1 x biggie transfer.
Hi EH
Probably an example of delayed gratification 😉
i have been topping up my SA aggressively so that the compound interest has more time to work it's magic. I believe in a 3 prong approach – our hdb (fully paid), attaining SA minimum sum, and acquiring stocks for sufficient dividend passive income.
renewed investor
Hi Renewed Investor
Thanks for sharing on your experience. I think everyone should work on achievinf that 3 pronged approach at the end of the day before one could sustain financial independence.
Oh wow, just the blog post that I need, and thanks for pointing me to AK71. (Reading his posts now) Recently I've been toying with the idea of a self-fulfilling CPF minimum sum (standard amount of $161,000), since my annual total CPF interest already pulls in around $3000+. Based on average CPF minimum sum increase over the past 12 years, which average around $6,750 yearly, it wouldn't be that far of a stretch to achieve actually. Was this part of your thinking process as well?
Hi TI
Yes that's the thinking I would have. Assuming the average incremental for the ms is around $6, 750 yearly, it wouldn't be an impossible task to achieve if the ms is hit much earlier in the days. The interest from it alone should be able to sustain the increase eventually.
Hi, long time lurker, first time poster. Correct me if I'm mistaken, but the topping up of your special account is an irreversible move right – you can't use your special account to amortize your housing mortgage?
Hi Retireby35
Yes any move made to the special account either from topping up or switching from oa to sa is irreversible. So one needs to think and prioritize before making the move to switch.
Think, think, think and think above the common wisdom of compounding interests of 4%.
does topping up from OA -> SA qualifies for tax relief?
is there are max limit for SA? thanks!
i guess everyone risk profile are different ~ CPF 4% risk free against opportunity to build more wealth with added risk.
CPF SA is not really risk free. It is subjected to CPF policy shifting risk. It seems Govt like to touch CPF SA and RA rules and dare not touch CPF OA.
Even before I reached 55 in 2011, I have already seen my withdrawal age for RA shifted a few times.
55 –> 60
60 –> 62
62 –> 65
Ok. No free lunch. Not even with CPF
🙁
This is the part that I don't like most. Shifting goal post. On paper, the intention to help all retirees to avoid squandering their hard-saved $ and to extend it until they are 6ft under. BUT with this and the CPF Life, whose actual returns is yet to be known…..
I only top up my Medisave to the max. Hopefully, that they will lift the cap amount or remove it completely.
SnOOPy168
Hi Uncle CW & Snoopy
I think like Betta man said below, the retirement age is being pushed back because there are simply cases where too many Singaporeans are unable to meet the required MS based on their projections. As far as the withdrawal is concerned, I think it is unlikely they will move the goal post backwards.
Current batch of older folks really feel the impact of shifting goal post and tulan. We almost can see the light but it was shifted farther and farther.
Soon it will be shifted to 67
Younger folks may not know how is this feeling like.
Hi CW, I mean risk free as in Capital Protected 😉
i feel if one already done with asset allocation, whether 7K belongs to war chest or lower risk investment should have been already quite apparent.
I like the topup scheme for (ok almost if you prefer 😛 ) risk free + tax relief. problem with CPF rules, there are all over the place. so am not sure if there is a rule that stop u from 7K topup once u meet say "CPF annual contribution limit"
agree betta, if one meets MS, there's no need to worry about their goal pole shifting 🙂
I would say that government is unlikely to shift the withdrawal age (at 55 after setting aside the MS) due to the potential political backlash.
However, the draw-down age could be delayed beyond 65 as Singaporeans live longer in the future.
I agree with B in topping up CPF SA. One can max out the CPF SA and opt for Basic Retirement Scheme at 55. He can then withdraw 4% p.a from the remaining amount in the SA. This is like having an annuity plan that starts from age 55.
Hi Betta man
Agreed with what you said above.
I think as long as we are able to sufficiently meet the required MS amount, we'll be able to withdraw the excess by age 55 and unlikely they will do something to move the goal post backwards.
The idea looks great to me at the moment and I'll just have to trust the government for doing what they are doing on the policy at the moment.
Not sure can we compare CPF RA and its shifting post to commercial annuity.
Commercial annuity got shifting post?
Why not invest in SRS account assuming one can generate 4 or 5% CAGR? This gives an option to withdraw after 10 years.
Is there a limit to how much you contribute to CPF, or the 7k applies to all income levels? Does the tax relief stop when the Minimum sum is reached, i.e. putting 7k into SA just for the 4%, but not the tax relief?
I feel that putting $ into the SA also entails political risk. Since withdrawal is 20 to 25 years later, we essentially are betting that Singapore will continue to be doing well 20years later. If we are no longer performing as a nation, anything can happen.
PAP already lost 1 GRC, which has never happened before in 2006. What about the year 2035? It could be very different from what we see now. For better or worse.
CPF scheme can always be amended to "suit the situation". What has happened in the past – implementing the Minimum SUm, can always take shape in other forms.
It is the difficulty of projecting leadership beyond LHL that makes me hesitate about the topping up CPF.
Hi there, I've been following your blog for awhile and I'm looking to top up my SA just like what others did too. however, I've one question which I hope you could enlighten me – if I've transferred some monies from OA to SA account and I decided to buy a house later and is short-cash, will I still be able to transfer the monies from SA back to OA to use? Pls advise, cheers! 🙂
Thanks for your support.
Nope the transfer is irreversible so once you do it you cant reverse it back to your oa.
Hi, if my SA hit minimum sum amount before 55 year old, what happen to my cpf contribution? Still continue in SA or will transfer to OA?
Just wonderin, what is he minimum top up amount?
Hi B,
What would your advice (which one gives higher return/yield)?
1). Top up cash into CPF SA or
2). Top up cash into SRS
Am keen to find out how we could do periodic top up of CPF SA account? Could we do it online via CPF Online? Or will need to go over the counter?
Hi Seekay
To be frank, my only goal to topping up the SA is for tax deduction purpose. I guess the same for people who put money into their srs account.
I am not a big fan of the two to be honest in terms of return. I think its a good tool for people who are unable to grow their money on their own and it does provide a systematic way to grow but the restriction is a huge opportunity cost in my opinion plus a few of thr unknown factors.
Having said that, as a working employee myself i do occassionally transfer from oa to sa and also do top up but am treating the monies in my cpf as 0 in value. So im happy to see it as a bonus, not as obligations.
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