Can you inform me what was the former official CPF policy set by the govt that was previously discussed in Parliament and set into law that was changed without discussion in the parliament and changed in the law.
My understanding is that the 2.5% floor rate is written into law. Higher rates are not. While the 4.0% floor rate for MA/SA/RA is what I’d describe as “almost guaranteed,” it isn’t technically guaranteed. Effectively the government has knocked age 55+ SA down to the statutory floor rate. That rule change is well within the existing statutory provisions as I understand them.
"1. SA shielding was benefitting only a minority of cash and CPF-affluent persons 55 and above. In 2022, only 2% of 2022 CPF members were doing it (Parliamentary Q&A), and only 40% had the pre-requisite Full Retirement Sum (FRS) to even consider it.
I think this comment is overstating matters. You only needed a little more than the Basic Retirement Sum, plus a small property that was charged (or could be pledged), to make “SA shielding” worthwhile. Let’s use an example of a member turning 55 this year (2024) when the Basic Retirement Sum is $102,900. And let’s suppose the member has these balances:
- SA: $70,000
- OA: $48,000
- cash: $20,000
In this example the member could “shield” $30,000 of SA. His/her new RA would be funded to $88,000 initially ($40,000 from SA, $48,000 from OA). Adding $14,900 of cash to that new RA (up to $8,000 of which would be eligible for tax relief), plus a property pledge or charge, would leave the member with $30,000 of liquid dollars in SA currently earning 4.08%. It’s also possible the member‘s spouse could transfer OA dollars into his/her RA to make up some or all of that $14,900. Let's assume there is no spouse in the picture. Here are the before/after liquidity positions:
- Before: $20,000 of all purpose liquidity ($68,000 of total liquidity for housing)
- After: $40,100 of all purpose liquidity (SA=$30,000, cash=$5,100, RA=$5,000)
That's a nice trade! And that's not counting the possible tax relief or factoring in a possible spouse's OA contributions. It's also possible to meet the BRS later, not necessarily upon RA formation at age 55. Although that would lose out on RA's attractive interest rate, so it's probably not a great idea to wait.
Does this situation involve an “affluent” CPF member? I’d vote no. “BRS and a little more” is not what I’d describe as affluence. Yet SA shielding would offer this member a significant advantage in nailing down a high interest rate liquid account, in this example $30,000 worth. Not any more!
N.B. I don’t think this member should’ve stopped at the BRS. I think this member should’ve tried to boost his/her Retirement Account higher. But I’m just illustrating the fact “shielding” wasn’t only for the “affluent.” In fact, the cost of shielding is higher when a member has a larger SA balance. The larger the SA balance is, the more months needed to break even on the shielding operation. Yes, many “SA shielders” were/are more financially savvy than average. Affluent? Many, but not always.
In an alternative reality the government could’ve allowed every age 55+ member to keep up to $20,000 in SA, for example. It could’ve easily done that by adjusting the RA “sweep” rules and moving >$20K to OA. It makes sense to me that the government would allow members to maintain a small “liquid emergency reserve“ as a policy goal. But evidently the government feels the (up to) $5,000 age 55+ RA withdrawal option is enough.
2. CPF is not a bank account – and shouldn’t be, especially not for the minority affluent when Government gives you above market rates. CPF is a pension plan – it is an insurance product, an annuity and a very good one! If a commercial insurer had offered it, it would have sold like hotcakes. For those after 55 with the money, it means that CPF becomes more, not less useful, as there’s now more of this excellent annuity to buy. 99% of members have headroom to do it.
Lucky us being in that <1% category.
Meaning the age 55+ person in my household has a SA balance that substantially exceeds the gap between the 2024 ERS (current RA) and the 2025 ERS. Many of those SA dollars can’t be shifted to RA. Those SA dollars will have to be invested elsewhere to make financial sense. OK, so be it.
Although there’s a little bit of saving grace. Previously raising the RA to the new ERS involved a cross-spousal OA to RA transfer. But that left OA dollars behind. (The donor spouse still had leftover OA dollars.) In early 2025 the donor spouse should be able to drain all OA dollars with this transfer since there will be more than enough room for that. But even so there will be a limitation.
3. On returns – Government has clarified that in the accumulation phase from 55 to 65, the interest rate is equivalent to the SA’s.
If you’re smart and can afford it (don’t genuinely need the money as early as allowed) you won’t start CPF LIFE payouts at age 65. You’ll wait. The default starting payout age is 70.
I think partly for political reasons the government likes to talk about 65 a lot. But it’s not actually the best idea to start payouts then. If you don’t need the money yet. If you do, fair enough.
