FRS vs ERS

[elnewbie]

This has been discussed multiple times before. Please state the product and the good brothers here will do quantitative analysis and let you know if it's indeed better or your advisor is trying to hoodwink you.

What if my advisor recommend other annuity better than cpf life?

 

[Wood41]

You are probably the only one who has a good & trusted 'advisor' who knows some secret annuity gem that few knew.

What if my advisor recommend other annuity better than cpf life?

 

[BBCWatcher]

Already told you everyone must lose. Provider must win. This is how insurance works.

And thank you for pointing out that insurance is not comparable to non-insurance. However, that's not exactly how government-provided insurance works, at least not in this fairly unusual case.

If you only look at the actuarial value-for-money of CPF LIFE you won't find any better deal. In fact, CPF LIFE fully accepts that bet. CPF LIFE lets you take an alternative deal if you want one. You can buy a lifetime annuity from some other entity if you wish. If you do, you can apply for exclusion from CPF LIFE. So go right ahead and try to beat CPF LIFE. The program itself is entirely open to avoidance if you're successful in that search. (Good luck!)

There's one more very important fact: the premium accumulation toward your lifetime annuity is like nothing else. The government grants unique tax relief as you build up your premium, and the government also provides extraordinary above market interest. Where are these extraordinary yield benefits coming from? Well, in part, they're coming from taxes that foreign workers pay, especially if you consider all government revenues fungible. So I suppose there are some "losers," but they're not Singaporeans.

 

[foozgarden]

What so great about CPF Life? It's a bet that all are forced into.

The old min sum scheme is calculated to exhaust one's RA in 20 years. So if you are 65, your payout from RA will last to about 85. And under this scheme, the payout is much higher than CPF Life which is for life.

The last cohort before CPF Life will get monthly payout of $1,240 with min sum of $139,000. Under CPF Life you need min sum of $166,000 to get similar payout.

but if the person has a choice for MS, the 4~5% in OA/SA will be a better choice. there is more flexibilty, and also, the whatever balance in OA/SA can be bequeath to the living survivors

 

[BBCWatcher]

but if the person has a choice for MS, the 4~5% in OA/SA will be a better choice.

No, that's not a given.

CPF LIFE is insurance that prevents outliving one's savings. Nothing else CPF offers/offered is that. If you're a billionaire then there's at least a reasonable argument longevity insurance isn't a high priority. If you're of limited financial means (or have unreliable wealth) and in good health, then CPF LIFE can be quite sensible.

 

[happylor]

Hi BBC,

My uncle worked oversea, 55 at 2020. Appreciate your advise for his Retirement, and shall he top up his all three CPF to max before 55 , or is too late?

OA = ZERO
SA = 60,000
MA = 32,000

Have HDB and Cash

Many Thanks

 

[BBCWatcher]

My uncle worked oversea, 55 at 2020. Appreciate your advise for his Retirement, and shall he top up his all three CPF to max before 55 , or is too late?
OA = ZERO
SA = 60,000
MA = 32,000
Have HDB and Cash

It’s not too late, and that’d be a very reasonable thing to do.

All three accounts, no, probably not — not yet anyway. His SA and MA earn higher interest than OA, and so they should get the first dollars. If he owes income tax in Singapore then he’d also be eligible for some tax relief with SA and MA top ups. I think I’d focus on SA first, especially if he plans to retire outside Singapore (where MA isn’t too useful).

There’s a possible “SA shielding” trick that he could do just before his 55th birthday, if he used OA funds for housing, and if he repays OA funds. But that “trick” should come after topping up SA substantially, which he can do now. He’s age 53 or 54 right now, and the 4% interest on a Special Account is very attractive. And I think it’s a little too late/too risky to invest in other assets if you’ve described his entire wealth, so yes, it would be a great idea for him to push up his SA.

 

[limchooc]

Hi BBC;

I have contributed to FRS when I am reach 55. Last year (Dec 2018) I decided to top up my RA with another $50K (based on the advice by a CPF staff during Road Show) to increase my monthly pay out when I reach 65. However, from my yearly statement I just received from CPF it show that my estimated pay out for standard life plan is still at around $1200 per month.

Q1. Why there is no increase in my est. monthly pay out after I put in additional $50K ?

Q2. Is it advisable to continue top up my RA to ERS each year until I reach 65 ? According to the CPF staff I spoke to the monthly pay out different won't be so great if I continue to top up.

 

[happylor]

It’s not too late, and that’d be a very reasonable thing to do.

All three accounts, no, probably not — not yet anyway. His SA and MA earn higher interest than OA, and so they should get the first dollars. If he owes income tax in Singapore then he’d also be eligible for some tax relief with SA and MA top ups. I think I’d focus on SA first, especially if he plans to retire outside Singapore (where MA isn’t too useful).

There’s a possible “SA shielding” trick that he could do just before his 55th birthday, if he used OA funds for housing, and if he repays OA funds. But that “trick” should come after topping up SA substantially, which he can do now. He’s age 53 or 54 right now, and the 4% interest on a Special Account is very attractive. And I think it’s a little too late/too risky to invest in other assets if you’ve described his entire wealth, so yes, it would be a great idea for him to push up his SA.

Thank you BBC:
I would inform him to Top Up his SA immediately. Yes, he use all his OA for his HDB that he is still staying in it.

I would inform my aunt too, as she stopped work for years. would it be better for her to Top up her savings to max SA (SGD166,000?) to earn the 4%, which she invested Mutual Fund at the bank. [She can continue to use the SA to buy fund too?]

Thank you for your generous sharing and helping those who are less well verse in retirement and investment management!

 

[Urbanchap]

Hi BBC;

However, from my yearly statement I just received from CPF it show that my estimated pay out for standard life plan is still at around $1200 per month.

I dun see any est payout in my yearly CPF stmt. Not surprising since you only select std/escalating/basic option just before 65. You can use the online estimator for estimated payout.

 

[BBCWatcher]

I would inform my aunt too, as she stopped work for years. would it be better for her to Top up her savings to max SA (SGD166,000?) to earn the 4%, which she invested Mutual Fund at the bank. [She can continue to use the SA to buy fund too?]

The current Full Retirement Sum is $176,000 (2019). If she's under age 55, yes, she can top up her Special Account in any amount up to the Full Retirement Sum. It doesn't sound like she owes any income tax since you say she stopped work, but if she does then the first $7,000 of her top up will be eligible for tax relief.

If she is age 55 or older, she can top up her Retirement Account to the Enhanced Retirement Sum (ERS), which is 50% higher than the FRS.

Do you know which "mutual fund" (unit trust, I assume)? And did she invest in that unit trust using the CPF Investment Scheme-Ordinary Account?

There is a CPF Investment Scheme for the Special Account, but it doesn't offer many choices. I don't think any of the CPFIS-SA choices are as attractive as the traditional account interest.

Q2. Is it advisable to continue top up my RA to ERS each year until I reach 65 ? According to the CPF staff I spoke to the monthly pay out different won't be so great if I continue to top up.

True, your future CPF LIFE monthly payout doesn't increase much when you fill any gaps every January to the Enhanced Retirement Sum. But those small top ups still enjoy excellent returns.

 

[happylor]

The current Full Retirement Sum is $176,000 (2019). If she's under age 55, yes, she can top up her Special Account in any amount up to the Full Retirement Sum. It doesn't sound like she owes any income tax since you say she stopped work, but if she does then the first $7,000 of her top up will be eligible for tax relief.

If she is age 55 or older, she can top up her Retirement Account to the Enhanced Retirement Sum (ERS), which is 50% higher than the FRS.

Do you know which "mutual fund" (unit trust, I assume)? And did she invest in that unit trust using the CPF Investment Scheme-Ordinary Account?

There is a CPF Investment Scheme for the Special Account, but it doesn't offer many choices. I don't think any of the CPFIS-SA choices are as attractive as the traditional account interest.

Yes, she dont have any tax to pay. She put her cash in UOB and bank sold her the JPMGIFA:LX, and she also bought NTUC INCOME Harvest & Growth. I guess she could continue to use her SA money to purchase endowment rather than paying cash? [Any article link to read up what you mentioned about SA Sheild Trick?]. Many Thanks!

 

[BBCWatcher]

She put her cash in UOB and bank sold her the JPMGIFA:LX, and she also bought NTUC INCOME Harvest & Growth.

JPMGIFA is a JPMorgan Global Income Fund domiciled in Luxembourg. It's an actively managed fund, and at the moment it seems to be holding a lot of U.S. dollar cash and cash equivalents (~10%), which is "interesting." "The Fund's objective is to provide income by investing primarily in high yield corporate bonds and equities, as well as emerging market bonds, investment grade bonds, real estate investment trusts and convertibles." There's a typical initial sales charge of 5%, which is undoubtedly why UOB sold it to her. There's also a redemption fee of 0.5% and an annual expense ratio 1.45%. It's an expensive fund, and there are some happy bankers enjoying that expense. However, it is domiciled in Luxembourg, and that's good from a tax point of view. According to Bloomberg, JPMGIFA's 1, 3, and 5 year total returns (per annum) are -2.63%, 5.20%, and 4.16%.

JPMGIFA's portfolio is really not appropriate (as a large percentage of her wealth) when she's retired in Singapore, spending Singapore dollars, since it's a global fund. I don't like JPMGIFA's high costs, so I don't think it's a good place to put more dollars. But there's also a redemption fee. What she might considering doing is to ease out of that fund, gradually, as she needs funds for day-to-day living expenses.

NTUC INCOME Harvest & Growth.... I can't find that one immediately. Any more clues?

I guess she could continue to use her SA money to purchase endowment rather than paying cash?

No, that's not a good idea in my view. The investment choices available through the CPF Investment Scheme (SA) are quite limited, tend to be high cost, and tend to have unattractive yields relative to traditional SA interest.

[Any article link to read up what you mentioned about SA Sheild Trick?].

Just previous posts in this forum, but I can explain it briefly. Let's use your uncle as an example, age 53 or 54 today. He has a $0 balance in his Ordinary Account since he used his OA to pay for his HDB leasehold.

What he could do a couple months before his 55th birthday is to repay $141,000 to his Ordinary Account, and I'll explain why $141K is a good number in just a moment. Then he could use the CPF Investment Scheme (SA) to invest all of his Special Account dollars, including any top up dollars, except for $40,000 (the minimum that must remain in his SA), in a conservative Singapore dollar bond unit trust. He would do that through a zero fee platform such as POEMS. On his 55th birthday, CPF would then take the remaining $40K from his Special Account plus the $141K from his Ordinary Account and create his Retirement Account in the amount of $181K. That figure, $181K, is the Full Retirement Sum for the year 2020, and that's why a repayment of $141K is a good number for these purposes.

Immediately after CPF creates his Retirement Account, he could then return the unit trust dollars into his Special Account. He might have gained or lost just a few dollars with a stable unit trust (and a zero fee platform), and that's fine. He then ends up with a fully stocked Retirement Account and lots of Special Account dollars, both earning 4+% interest instead of the lower 2.5% Ordinary Account interest. And that's why people like this "shielding" trick, at least as long as it still works.

Does all that make sense?

 

[maple96]

NTUC INCOME Harvest & Growth.... I can't find that one immediately. Any more clues?

Of course u cannot find cos no longer sold but if u did google u shld be able to find

those are good, more than 4% pa compounded returns, she just need to wait till maturity and all monies will return to her (she used cash)

 

[maple96]

[Any article link to read up what you mentioned about SA Sheild Trick?]

From another thread where someone asked how to do it:

First u need to understand what are the risks and rewards in using this "hack".

1. Risk of capital loss should your investment turn negative, plus cost of buying/selling the investment. Interest loss on SA funds should not be a major criteria in making this decision because u are eyeing on the potential future rewards.
2. Rewards - potential future returns on the SA funds u shielded, ie 4% compounded interest.

Second, u need to confirm how (ie procedure) u can use SA funds to buy and sell the intended investment instrument.

From CPF website:

CPFIS-SA
There is no need to open any CPF Investment Account if you wish to invest your SA savings. Thereafter, you can approach the*product providers*directly to buy or sell your investments.

U need to approach the providers of the investment instrument u intend to buy/sell. Discuss and understand the procedures or steps involved and timelines. This is what u need to confirm. Once confrmed, before u reach 55, based on the timelines u obtained (maybe a mth or less before to minimise your capital loss risk), ask your provider to buy. After your RA funds had been setup at 55, approach your provided to sell.

Makes sense?

(disclaimer: I am not adopting this hack, just sharing my logical thinking)

If u topup SA (other than transfer from OA), those monies will be "frozen" as shared by someone. U cannot invest such topup monies if it exceed the min 40k, eg only 40k of SA cannot be invested, if u do topup of 60k, then 60k cannot be invested, eg if u do topup of 30k, then only max 40k cannot be invested.

 

[BBCWatcher]

If u topup SA (other than transfer from OA), those monies will be "frozen" as shared by someone. U cannot invest such topup monies if it exceed the min 40k, eg only 40k of SA cannot be invested, if u do topup of 60k, then 60k cannot be invested, eg if u do topup of 30k, then only max 40k cannot be invested.

Yes, adjust the shielding math depending on your circumstances. It appears this particular uncle can shield $60,000, possibly more if he repays some OA before age 55 and transfers OA into his SA. So something like this (for example):

1. Top up $40K to SA;
2. Repay $282K into OA;
3. Transfer $141K into SA;
4. Shield $141K in SA;
5. Retirement Account gets created on the uncle's 55th birthday with the $40K top up plus $141K remaining in OA = Full Retirement Sum.

 

[ELKYme]

In the first place, why place funds in SA and then use it to purchase an endowment plan?
Isn’t a 4% compounding account that’s relatively risk-free attractive enough for your aunt?

Believe many here have the intention to use the SA shielding “hack” in order to protect the 4% interest that SA offers....they will not be likely be investing/purchasing endowment with the funds in that account (SA).

Yes, she dont have any tax to pay. She put her cash in UOB and bank sold her the JPMGIFA:LX, and she also bought NTUC INCOME Harvest & Growth. I guess she could continue to use her SA money to purchase endowment rather than paying cash? [Any article link to read up what you mentioned about SA Sheild Trick?]. Many Thanks!

 

[BBCWatcher]

In the first place, why place funds in SA and then use it to purchase an endowment plan?

I really don't think you would based on today's endowment plans. Based on long ago endowment plans previously available, maybe.

And we should point out that the first $60,000 of combined CPF balances is eligible for bonus interest. It is technically possible to dig into 5% territory using the CPF Investment Scheme (SA), and that would be especially difficult to justify.

 

[happylor]

In the first place, why place funds in SA and then use it to purchase an endowment plan?
Isn’t a 4% compounding account that’s relatively risk-free attractive enough for your aunt?

Believe many here have the intention to use the SA shielding “hack” in order to protect the 4% interest that SA offers....they will not be likely be investing/purchasing endowment with the funds in that account (SA).

Thank you BB, Mapple96 and ELKYme !
As I am not familiar with these, my aunt was thinking using the SA money to by those similar to NTUC INCOME Harvest/Growth/Ideal Plan, where she safe/invest get 3.8%+ return plus Insurance coverage. She do have some of those plan purchase via her OA and SA, which maturity at her 55 too. [Those Cash Value go back to her OA and SA upon maturity? I need to help her check with her NTUC Income agent, also share with them how much to Topup their SA before 55].

Thank you for all who share and contribute in this discussion. I guess we should start in a SEPARATE Heading to benefit more not financial savvy senior. [I just saw POSB CNY Promotion at the bank, promote 8.8% FD..... many retiree holding their bank book q for it..... In fact, need more people like you all....]

 

[tidalstorm]

Yes, adjust the shielding math depending on your circumstances. It appears this particular uncle can shield $60,000, possibly more if he repays some OA before age 55 and transfers OA into his SA. So something like this (for example):

1. Top up $40K to SA;
2. Repay $282K into OA;
3. Transfer $141K into SA;
4. Shield $141K in SA;
5. Retirement Account gets created on the uncle's 55th birthday with the $40K top up plus $141K remaining in OA = Full Retirement Sum.

Can check with u if my understanding is correct.
Assuming I have the following;
Current Oa= 141k
Current sa= 200k
Can I invest 160k out from sa before turn 55. When ra is created, where 141k from oa move to ra then I sell my investment to throw 160k back to sa?