Understanding CPF
Topping Up Your CPF: What Are The Pros & Cons?
If you heard that you are able to be a millionaire just by topping up your CPF. You might be moved to do the same.
But is it really as easy as it seems? Or perhaps what is the catch? Well, this article will discuss more on The Retirement Sum Topping-Up Scheme (RSTU).
What is The Retirement Sum Topping-Up Scheme (RSTU)?
It is the ability for you to top up your CPF account via top-up of cash or transfer from your Ordinary account to your Special account.
Consisting of either
- Cash Top-ups
- CPF Transfers
If you are below aged 55, you can only top up to your CPF Special account.
Anyone aged 55 and above, can only top up to their Retirement Account.
The main focus of this is to enhance your retirement funds.
READ ALSO: Things You Should Know About CPF Retirement Account (RA)
Rules of the RSTU
Will divide this into two sections. The Cash Top-ups and the CPF Transfers.
Cash Top-ups
The maximum you can only top up in a calendar year is $7,000.
You can also top up your spouse, parents, parents-in-law, grandparents, grandparents-in-law, and siblings CPF accounts. (With the same limit of $7,000 per the calendar year.)
However, if you want to qualify for tax relief for topping up your loved ones CPF accounts, you must fulfill one of the conditions:
- Income (e.g. salary or tax-exempt income such as bank interest, dividends, and pension) not exceeding $4,000 in the year preceding the year of top-up*; or
- Handicapped (incapacitated mentally or physically)
You can also top up your child’s account as well, however, the contribution is not tax-deductible.
CPF Transfer
You can transfer to your own account. You are also able to transfer to your spouse, parents, parents-in-law, grandparents, grandparents-in-law, and siblings.
However, you are not able to transfer to your children’s’ account.
The maximum amount you can transfer to your own CPF Special account is the amount that is lesser than the current Full Retirement Sum (FRS) that includes of any amount that you have used for your CPF Investment Scheme for Special account.
You have to make sure that you are certain with the transfer. One big reason is that you are not able to reverse that transfer. In other words, it is non-refundable.
READ ALSO: Breaking Down CPF LIFE And How It Can Be Included In Your Retirement Plan
The Pros of the RSTU
- Earn risk-free interest
CPF Special account gives an interest of 4% annually. The best part is that it is risk-free. If you are indeed a risk-averse individual, this is a perfect instrument for you to accumulate your money.
- Income Tax relief
Even being in a country with low-income tax rates, you would still love any tax relief that you can get. The amount that you have top up to your own account will be the amount of tax relief for that year.
- A larger monthly payout
As most of you know, the main reason why the CPF exists is that it is to help you set aside funds for your retirement.
With that, upon your retirement age, you will start to receive a monthly payout. By topping up your CPF account, you will simultaneously increase your monthly payout as well.
The Cons of the RSTU
- Illiquidity
Unlike a bank account, the CPF account is not flexible in terms of liquidity. You cannot easily withdraw the money that you have already put in.
The only time you can withdraw the money is when you reached the age of 55. To top that off, the amount will depend on the retirement sum at the year when you reach 55 and also the total amount you have at that age as well.
Therefore, if you are considering putting money in your CPF account, do make sure it is money that you are willing to part with and not need for years.
- Opportunity cost
Risk-free interest at 4%! Great!
But what if you have the chance of investing your money elsewhere, and earn much higher interests? You would be losing out on the chance of earning more money.
Well, that is called opportunity cost.
With the fact that you cannot retake back that money once you are in, you have to accept that risk-free interest of 4% as your investment gain.
- Policy change risk
Like mentioned above, you can withdraw your money at the age of 55. That is what the CPF rules at this moment (2019).
Imagine this, you started to top-up to your CPF account since the age 30 and with the expectations to enjoy the fruits of risk-free interest at age 55.
But what if the CPF regulations change and you can only withdraw your CPF monies at aged 60 instead? A new regulation that was implemented five years before you reached 55.
What if your plan was to retire at 55? Due to the policy change, you would still need to continue working just to pay for your daily expenses.
This is an example of a policy change risk.
We are not saying this will happen but anything is possible. It is not in your power to determine the regulations of the CPF.
Well, it is a risk-return principle. You do really have to give in something for that risk-free interest.
READ ALSO: Useful Facts About The CPF Contribution & Allocation Rates
Think and plan ahead prior to topping-up
Putting your money inside your CPF account is certainly an option that anyone can take but you should know where you are at financially.
After all that has been explained above, you roughly know whether you should top up your CPF account.
Your age and when you intend to retire should also be a factor when deciding.
At the end of the day, the main use of CPF is to prepare for your retirement. And that is your goal too.
The RSTU is just another way for you to be better prepared for it. You should still have other ways and plans as well.
When you have your accumulation plans diversified, you would not be over-panicking when one of them fails.
You do not have any room for failure the nearer you get to your retirement age.
Therefore, if anyone of your retirement plans default, you can still rely on the others.
And that what is called diversification.
That comes to the end of this article. Hope that this is beneficial for you and do share it with your family friends. Till next time.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
