When was the last time you heard the terms “1M65” or “1M55” thrown around in retirement planning discussions? Or perhaps, the buzzword “CPF Shielding” used to dominate conversations among friends? Well, it seems like those days are over with the recent announcement of the Special Account closure in Singapore’s Budget 2024.

As you may have heard, significant changes to Singapore’s Central Provident Fund (CPF) system were unveiled during Budget 2024, causing quite a stir. Amidst the complaints, grievances, and misunderstandings flooding internet forums, I’ve decided to write this article.

As a financial professional who specializes in retirement and investment, I hope I can provide clarity on what’s really matters, and how you should approach these changes objectively.

“Return My CPF” Movement – a Bit of History

Having been in the financial industry and writing blogs for quite some time, I understand that things aren’t always as they seem, especially when it comes to money. To comprehend money matters, a bit of historical context is essential.

You might be under the misconception that people were always enthusiastic about topping up their CPF. However, not too long ago, there was considerable discontent surrounding leaving money in the CPF.

CPF underwent a significant change in 2015, replacing the Minimum Sum Scheme with Retirement Sum Scheme. This change sparked the “Return Our CPF” movement in 2016, with people expressing concerns about CPF’s “inflexibility,” “low rate of returns,” and “lack of transparency.” People were protesting to get their money out of the CPF system.

Image Source: Straits Times

Let me be clear; I understand the good intentions behind the government’s policies, and I support them wholeheartedly. However, I believe clearer communication and better financial education may be needed for such changes.

I believe CPF has learned the lesson and engaged in a huge marketing campaign by leveraging social media and influencers. The campaign was so successful that people a finding ways to maximize their CPF top-ups nowadays.

Pension Management: A Tricky Subject

Most countries tend to kick the pension crisis can down the road until a major disaster strikes. Much attention has been paid to the U.S., but you may not be aware that the whole world has faced pension troubles. Recall the Euro Debt Crisis from 2009 to 2012, where several member states, including Greece, Ireland, Portugal, and Spain, struggled to repay their government debt due to high pension costs and mismanagement of pension funds.

More recently, in September 2023, the UK faced a pension liquidity crisis, primarily involving defined benefit (DB) pension funds. Throughout these turbulent times, Singaporeans were fortunate to still enjoy a floor interest of 2.5% in their OA funds, 4% interest in their SA and MA funds, and CPF Life being hailed as the “best annuity”. However, every coin has two sides, which is why I discussed CPF interest rates in a previous article in 2019.

Here is what I wrote,

“Through many conversations with my clients, I discovered that there is overwhelming confidence that the government will NEVER change the interest rate as it is too much “political risk”. Therefore, any tiny tweaks of the CPF system such as reducing the interest rate, and/or postponing the payout age will inevitably result in a public outcry.

Little did I imagine that the CPF would make an even more drastic change of closing down your CPF Special Account when you are age 55.

What Happens to Your CPF When You Turn 55

So, what’s all the fuss about? Imagine this: you’ve meticulously planned your retirement, eagerly anticipating your golden years, and then, out of the blue, changes to your CPF accounts are announced when you hit 55.

In the good old days, turning 55 meant you had four CPF accounts:

  • Ordinary Account (OA)
  • Special Account (SA)
  • Retirement Account (RA), and
  • Medisave Account (MA).

Each of these accounts served its own unique purpose in retirement and healthcare planning.

The amount in your OA and SA would be combined and transferred to your RA to form your retirement savings. This transfer was automatic.

But there was a magic number called the Full Retirement Sum (FRS). To understand the FRS, you need to know a bit about CPF Life, another extensive topic. In essence, once you set aside enough “premium” for your annuity, you’re free to deal with the rest of your OA and SA balance, whether you withdraw or leave it in CPF to earn interest.

In other words, if the combined balance in your OA and SA exceeded the FRS, the excess would remain in your SA and continue earning a minimum of 4% interest rate.

But Singaporeans always like to “game the system.” And thus, “CPF Shielding” was born.

What Is “CPF Shielding” and Why Is It “Bad”?

Essentially, CPF shielding involves channeling excess funds from the balance in OA instead of SA to the RA when you hit age 55 , ensuring that the remaining surplus CPF balance continues to earn the attractive 4% interest rate offered by the SA. This is usually done by investing SA temporarily to lock in out of the CPF account.

In other words, if you have more CPF, you can earn extra interest that was not designed to be given to you. This was considered a “loophole” because it deviated from the original intent of CPF as a retirement savings plan for all Singaporeans.

You need to understand that only people with more than the Full Retirement Sum (FRS) of $205K CPF would benefit from such “shielding.” Since you can withdraw your CPF SA anytime after turning 55, it becomes a high-interest savings account for the rich, and they can make “on-demand” withdrawals anytime.

As the Ministry of Finance clearly stated, “As a principle, only savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate.”

What Happens to the CPF Special Account Now?

You can watch the details in the video below but let me sum it up for you.

Starting in 2025:

  • The Special Account will be closed for individuals aged 55 and above. Any remaining funds will transfer to the Retirement Account, currently earning the same 4.08% interest as the Special Account.
  • If the Full Retirement Sum has already been reached in the Retirement Account, funds that would usually be in the Special Account will be diverted to the Ordinary Account (lower interest).
  • No change for those below 55: Individuals below 55 will keep their Special Account, with contributions continuing as usual.

So at 55, you’re left with just three accounts instead of four accounts, no matter how much you’ve socked away.

Higher RA Limit, Higher CPF Life Payout

So what can you do with your OA since you can no longer “shield” it and earn a higher interest? The government has a plan for you.

The RA limit, which is the Enhanced Retirement Sum (ERS) has been increased to four times the Basic Retirement Sum (BRS) instead of three times previously. Below is the new limit.

Source: Straits Times

A higher limit means a higher premium and can generate more payouts from your CPF Life.

Do note topping up RA is voluntary, and while you can shuffle some cash from your OA to your RA, don’t expect to make any withdrawals from that RA anytime soon. It is a one-way ticket. Payouts from CPF Life? They’re on the table starting at age 65.

With the loophole being sealed shut, it brings CPF back to its roots as a retirement savings plan for the masses, not just a playground for the wealthy seeking high-interest returns.

Why Not Let the Rich Earn a Bit More?

Then you may ask, why should you care if the rich earn more interest?

Because the interest that CPF paid is not plucked from thin air; it has to be generated somewhere. I will probably write an article about how CPF is invested so they can pay you the interest next time, subscribe at the bottom of the article for future updates.

But now let’s talk economics for a second.

There is a golden rule in finance called the “investing trinity,” which consists of the crucial aspects of any investment: risk, liquidity, and return. You can achieve any two of them but not all three.

For most people, the CPF Special Account offered a high guaranteed 4% return with low risk but low liquidity. This makes sense.

But for people who have excess CPF, it deviated from the investing trinity principle, as high returns were achieved with low risk and high liquidity.

If CPF has to pay you high interest and yet you can withdraw anytime, it makes the entire CPF system unsustainable in the long run and everybody will suffer.

The recent CPF changes aim to rebalance the equation by giving you two options:

  • Reducing the guaranteed return: Lowering the interest rate for SA funds by transferring it to OA, or
  • Reducing the liquidity: The increased RA limit gives you a higher return for your CPF by sacrificing your liquidity since it is a one-way transfer.

A Wake-Up Call but Not Doomsday

I find it amusing when some influencers exaggerate the CPF changes. It’s as if not earning the extra 1.5% interest is a retirement doomsday for them.

So, how do we navigate these choppy waters? Well, let’s not forget investing is a journey, not a destination, and we’ve got to stay nimble in the face of ever-changing financial landscapes.

It’s easy to champion a strategy like CPF Top-Up, REITiree, or buy-and-hold-ETF. But without considering the dynamics financial world and regulatory regime, all these are just “盲人摸象” (Blind men touching an elephant).

How many people have actually done property retirement planning, with or without professional help?

I say this not because I am a financial adviser, but because most people I observe have been blindly topping up CPF and SRS without knowing how much and why.

Mark Twain said,

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The CPF 2.5% interest rate used to be the gold standard and so many people say CPF investments cannot beat this return. Look at today’s higher-interest world, it’s not exactly a showstopper. You can easily achieve it by investing in Singapore Government Securities and T-Bills.

Navigating the New CPF Landscape

Paul Getty, one of the wealthiest people in history, said,

“The first step to getting rich is not thinking about saving money. It’s about thinking about earning more.”

Consider this your wake-up call to pay closer attention to your own wealth and investment. If you want to enhance your CPF returns after 55 under the new regime, here are 3 things you can do:

  • Transfer your OA to RA to earn a higher interest but give up the flexibility.
  • Invest your OA under the CPF Investment Scheme (CPFIS).
  • Withdraw your OA as cash to invest so you have many more options.

Now, if you’re scratching your head wondering how to make the most of your CPF in light of these changes, don’t worry – I’ve written an article and a “CPF Investment Guide” which you can download here.

Let’s remember that wealth and retirement planning are not static endeavors but dynamic journeys. By staying informed, adaptable, and open to new strategies, you can seize opportunities and build a more secure financial future.

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As an independent adviser, I help my clients manage their investment portfolios so they can retire early and happily. If you are interested in reviewing your investments, apply for an investment discovery meeting using the form below.

Until next time, happy retirement!

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • with the impromptu cpf policy changes and obviously more to come in the near future, it’s not very discerning for most denizens, specially the low-middle income folks. cpf is not exactly user-friendly, if it was, many would not have difficulties in comprehending how it works.

    The usual comment is “go to cpf board to clarify’..in reality, not many folks have the luxury to find time to do it and those who’re less educated, would be clueless about the cpf. Govt is not doing lots to aid in this area. There should be more solutions in making cpf more comprehensive for the ordinary layman.

  • Assuming at age 65, we trigger our participation in one of the CPF Life annuity plan, ie our funds in the RA is used to buy premium to participate in CPF Life. If so, does the premium amount still continue to earn the minimum 4% p.a. interest rate (after 65 years old and after our participation in the CPF Life annuity plan)?

    • Hi, Joseph

      If you are asking whether the “premium” in CPF life still earns a minimum 4% p.a. interest rate after 65 years old. The answer is yes. That is one of the reasons why the total payout of CPF life can potentially be more than your original “premium”.

  • Although transferring from SA to RA could earned interest in RA but at the same time, it’s also increasing our burdened without SA & it may also caused poor peoples lost of their HDB flat without SA!

    Gov. never considered for those poor peoples who still need SA to deduct for their housing’s monthly instalments planned for repayment of minimum sum of amount to HDB (if their OA insufficient funds require such minimum sum of funds for deduction housing upon requested).

    Now without SA, where could those poor peoples find $ to pay for their housing after 55 years old without any saving…? cos’ in the oldies days, those Majulah peoples (55 years above) require to support the whole families with earning low income when the country was still under developing stage & majority of the Companies paid very low salaries.Thus, it was very difficult for them to save more $ by supporting their whole families.

    Hence, we hopes the government could open more options…(such as 1) Let RA able to deduct Housing? or 2) Let peoples able to draw out their balance cash amounts out from SA for repayment of housing? 3) Let employee’s CPF $ put more % in OA to replace SA after combination to increase of OA amount which able to deduct more on housing instead of divided the % more to RA & MA for those 55 years old after they ceased of SA?)?

    Please assist if possible to convey this message to the concern Gov. for consideration open more options…? Or help to request Gov. assisting those poor peoples to resolve their housing deduction problems from CPF Account? Many Thanks in advance!

    • Hi, Jeannie

      It seems that you had some misunderstanding. You cannot use SA to pay for your housing loan. SA and RA is for retirement purpose. If it can be used to pay for housing loan, then there will be two consequences.

      1. The Singapore’s property will become even more unaffordable.
      2. People have no disposable retirement income when they retire.

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