CPF Hacks you should be aware of

The CPF scheme was originally conceived as a Government assisted retirement contribution scheme. However, over years of reading blogs, you come across interesting ways people use it to achieve certain outcomes.

Here’s a collection of my favourite CPF Hacks that I feel everyone should know about.

Credits: Some of the ideas originate from A Singaporean Stocks Investor (ASSI), a veteran financial blogger who believes that CPF should be the cornerstone of your retirement.

Basic Hacks

1) When you contribute matters

Contributing in January or in December in any given year affects the eventual amount of interest you receive at year end. This is because of the way the CPF Board computes the amount of interest to pay its members.

CPF interest is computed monthly, then compounded and credited annually to your respective accounts. CPF interest earned in the preceding year will be credited to members’ CPF accounts by the 3rd working day in January.

Source: CPF FAQ

This means that you will earn 1 full year of compound interest if you contribute in January, versus 1 month if you contribute in December. So if you intend to contribute voluntarily to your CPF, do it as soon as possible.

2) Accrued interest and how you should handle it

Accrued interest is a controversial topic that contributed to the “Return My CPF” movement in prior years. Accrued interest is the concept that CPF monies withdrawn to fund a property purchase has to be returned to CPF with interest upon the sale of the property. This created a “Ownself pay ownself interest” scenario instead of the Government paying you the interest if you had left the CPF monies in your OA.

While I can understand that most Singaporeans cannot afford to own a home without using CPF funds, given the accrued interest issue, you should look to refund your CPF principal and accrued interest as soon as you are able so that you can let the Government compound your money, instead of doing it yourself. Or better, don’t use CPF monies at all to fund your home purchase.

3) Contribute voluntarily and save on tax

I have written on this in depth previously here and here.

Advanced Hacks

1) CPF as the bond component of your investment portfolio

Portfolio theory advocates that you should diversify your investments into different assets and asset classes to diversify away single asset risk. Bonds play a role in portfolio construction. Instead of buying government bonds that pay less or buying corporate bonds that are more risky (Hyflux 6% Perpetuals anyone?), ASSI advocates topping up your Special Account (SA) as a alternative. He views the CPF SA as a high interest up to 30 year bond backed by SG’s ironclad reserves.

Depending on your risk appetite, this might be a valid portfolio strategy.

2) Using your parents’ Retirement Account (RA) to earn higher interest

A ASSI reader came up with a pretty brilliant way of using her homemaker mom’s (i assume) RA account to earn high interest rates on her funds. As her parent’s RA is low, she can top up her parent’s RA without triggering CPF Life enrollment. This allows her top-ups to earn up to 6% interest. Plus, she can earn up to $7,000 in tax reliefs on her top-ups. She will ultimately receive back the funds by getting her mom to nominate her as the CPF beneficiary.

A pretty niche hack, but fascinating nonetheless.

3) CPF as a legacy planning tool

Did you know that any Singapore citizen can have a CPF account, including your new born baby? You only need to contribute to it for the first time for it to be opened.

So let’s say you want to leave a sum of money for your children to secure their future and are worried that they become snobbish little brats? You can either create a trust to manage the funds till they are of age. Or you can top up your child’s SA and let the Government be the gatekeeper like how this couple is considering. What’s more, the Government is helping your child compound the sum at 4% p.a. for 65 years!

4) Government subsidised medical insurance

As you might know, the Medisave account (MA) funds attract a 4% interest. You might also know that health insurance like the Integrated Shield plans can be bought using Medisave account funds. This effectively means that the Government is subsidising your medical insurance costs.

In fact, if your MA has the current Basic Healthcare Sum (the current MA balance cap) of $54,500, your annual interests from your MA would be at least $2,180. This should be sufficient to cover your health insurance costs.

As such, if healthcare and insurance costs is concerning to you, top up your MA to give yourself that necessary peace of mind.

Summary

The CPF can be a very versatile tool. From saving for retirement, to tax planning, to legacy planning and health insurance, CPF has a part to play.

Do you have any other CPF Hacks that you know and use? Do let me know in the comments!

Happy Hunting!
KK