Wednesday, 25 February 2015

Budget 2015: CPF changes

What does the CPF changes mean for you?
The income ceiling for CPF contributions will be raised from $5,000 to $6,000 from next year onwards.

An additional 1 per cent interest will be applied to the first $30,000 of CPF savings for those aged 55 and above next year, on top of the existing 1 per cent extra interest on the first $60,000 of savings. This means that the first $30,000 in Special, Retirement or Medisave accounts can earn up to 6 per cent interest.
First the easy details.

If you are over 55 and intend to leave at least $30k with CPF, you get another 1% interest.

Let's say you leave $60k in there and $30k earns 6%, and the next $30k earn 5%. In one year, you earn $3300 in interest in total. In 10 years, at simple interest calculations, you get $33,000. Your $60k become $93k. Compounded, it would be a little over $100k. When you are 65.

Not too shabby, but how long will $100k fund your retirement? If you are frugal and live on $20k a year, your $100k will last you 5 years. Probably less with inflation.

If you leave $100k in your SA at 55, at 65, it'll be about $160k.

But if you can afford to leave $100k in your CPF at 55 (this is over and above your minimum sum), your retirement issues (if any) would be quite manageable.

So again, this will help the higher income (one who can meet the minimum sum at 55 without much problem).

Sure, my calculations show that IF you have $100k in your SA and the additional 1% can increase that $100k to $160k - close to the minimum sum - by the time the CPF member is 65.

BUT, in order to have the full CPF Life at 65, you need to have $161k at 55 to grow to a sum that can be used for CPF Life. So having $100k at 55 is just not enough. Having $160k at 65 is a little too late.

It would have been more helpful to encourage CPF members to top up their SA/RA to the minimum sum at 55, with say a matching grant scheme.

Raised Income Ceiling

The other point was raising the CPF ceiling from $5000 to $6000.

Simply put, if you don't make more than $5000 a month, this doesn't affect you. Since $6000 is at about the 80th percentile and $5000 is about the 72nd percentile, this doesn't affect about 3/4 of Singaporeans. Or more.

While this is a good change, and will help the upper middle class or even those above the 80th percentile (in the first quintile), it is of no help to the low income. When half the workers in SG earns less than $3000, increasing the ceiling from $5000 to $6000 is literally going over their heads.

So, the sad, sad part of the CPF changes is that it is great news - if you are in the first quintile.And if you have at least $30k you don't mind leaving with CPF when you are 55.

In other words, colour me unimpressed.

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