Martin Lee @ Sg
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CPF Life Questions

This is a follow up on the earlier post on CPF Withdrawal and Minimum Sum scheme and will explore a couple of issues on CPF Life.

cpf life questionsThere is a handbook on CPF LIFE (guide B) which tries to explain in details how the scheme works. Before reading it, you can read the basic guide which gives an overview of the scheme.

I will not be repeating everything from the handbook but will try to extract some information from them and explain what are some of the possible misunderstandings of the scheme. This post should be read in conjunction with guide B.

Q: What happens when I join? (page 4 of guide B)

A: When you join CPF LIFE, all your retirement account (RA) savings will be used for your LIFE plan. Part or all of the RA savings set aside will be deducted to pay a premium for an annuity (called annuity premium) while the rest of your savings will remain in your RA. The annuity payout will start at various ages, depending on the LIFE plan that you have chosen.

The table in the booklet shows the annuity start age to be 90, 80, draw down age (DDA) and draw down age for the basic, balance, plus and income plan respectively.

A person looking at the table at face value might decide that he will prefer to go for the plus or income plan as he does not want to wait until age 80 or 90 before he can start to get his money. Someone using the payout calculator might also have the same thinking.

This is a misintepretation as no matter which scheme you choose, you will start getting a monthly payout from your DDA onwards.

Just that for the case of the basic and balance plan, your monthly payouts from your DDA till age 80 or 90 will come from the balance in your RA which has not been used to pay for the annuity. The diagrams from page 6 and 7 of guide B actually shows this quite clearly.

Q: Do my savings used for CPF LIFE continue to earn CPF interest? (Page 10 of Guide B)

A: Yes. Interest earned on the RA savings will continue to be paid into the RA. Interest earned on the annuity premium will be paid into the Lifelong Income Fund and pooled with the interest earned from the annuity premiums paid by the rest of the CPF LIFE participants to provide the life long payout under the scheme.

In addition, you will earn the extra 1% interest on the first $60,000 of your combined CPF balances including the annuity premium (less annuity payout) that had been deducted from your RA. This extra interest will be paid into your Retirement Account.

The “YES” here should not be taken at face value. A wrong assumption here is to think that no matter which plan you choose, there is no difference and you will continue to collect full interest.

The difference is that interest paid to your RA goes directly to you while interest paid from your annuity premium goes into the Lifelong Income Fund which might or might not benefit you (depending on how long you live). This will make a difference to the amount you leave to your estate should you pass away.

Say I have $100k. The estimated annuity premiums payable at age 55 should I opt for basic, balance or plus plan are $10k, $30k and $100k  and my RA would have $90k, $70k and $0 respectively.

After 10 years (at age 65), my RA would have (assuming 4% interest) $133k, $103k and $0. If I kick the bucket at that time, my estate will get the balance of my RA plus the unused annuity premiums which works out to be $143k, $133k and $100k respectively. So, someone who dies early will not be able to benefit from the interest earned in the Lifelong Income Fund which is reflected as a lower payout to the estate.

Basically, all these “lost interest” will be used to fund the monthly payouts to those who live longer. There is nothing wrong with this as this is the core essence of an annuity plan –  the pooling together of longevity risk.

However, if everyone starts living beyond 85, the scheme will either become unsustainable or payouts will have to be reduced significantly.

Under the old scheme where you only get $X/month for 20 years, it is simply not possible for everyone to get $X+y/month for life if the interest rate is the same under both schemes. Where does the extra money come from?

So while you are opting for your plan, bear in mind that the monthly payout figures are only projections which assumes a certain mortality rate and interest rate. There also isn’t a guaranteed minimum payout, which would have helped members see what is the “floor” of their monthly payout.

Another minor point is on the extra 1% interest earned which is supposed to go into your RA. Note that 1 or 2 months before your DDA, the Board will deduct another annuity premium from additional monies which had gone into your RA from age 55 to 65. This of course includes the extra 1% that you have been earning. The deduction will be based on the proportion of the original CPF Life plan that you choose (Page 12 of Guide B).

The last point I want to address is someone asked whether the premium that goes into the annuity scheme is fixed or based on a percentage.

It is actually based on a percentage of the amount you have left in your CPF as part of the Minimum Sum. The percentages of 10% and 30% for the basic and balance plan that is given now is only an estimate.

So, if I have $50k in my RA and opt for the basic plan, $5k (assuming an estimate of 10%) will be deducted to fund the premium. If I have $117k, then $11.7k will be deducted. Even if I have $200k in my CPF, it will still be $11.7k as I would have withdrawn $83k from CPF (after meeting the Minimum Sum requirements) leaving behind $117k in the RA.

Taken from the FAQ on the CPF website:

Q: Is there a maximum amount that I can use to join CPF LIFE?

A: When you join CPF LIFE you use all your Retirement Account (RA) savings to join the scheme. The maximum amount that you can use to join CPF LIFE is therefore the maximum amount you have in your RA which is the prevailing Minimum Sum (MS).

Q: Why can’t CPF members commit more than the prevailing Minimum Sum into CPF LIFE?

A: Some CPF members may want a higher lifelong income and are willing to pay more for this. The National Longevity Insurance Committee had considered this but recommended that CPF Board should focus on operating CPF LIFE as an integral part of the Minimum Sum (MS) Scheme. The MS represents the basic retirement sum that the Government will help members to accumulate. Should members desire higher monthly income beyond what is provided by the prevailing MS, they could buy annuities from commercial providers.

Leave a Comment:

May says 5 years ago

After reading the CPF life in CPF site, I am still very confuse.
When one choose CPF basic, the balance amount in RA will be used up then CPF life comes in. From CPF Life FAQ, there is too many details one has to take note when making decision. Do they put all or only FRS into RA after 55?

Q What happens if I choose the CPF LIFE Basic Plan?
When you join the CPF LIFE Basic Plan, we will deduct about 10 – 20% of your Retirement Account (RA) savings for the annuity premium at the point of policy issuance. The actual percentage will depend on your age and gender. We will inform you on the amount deducted when your policy is issued. The premium deducted will be paid into the Lifelong Income Fund. The rest of your RA savings will stay in your RA.

You will receive monthly payouts from the savings in your RA from your payout start age until one month before you reach 90 years old. Once you reach 90 years old, you will continue to receive monthly payouts from the Lifelong Income Fund for as long as you live.

Payouts under your CPF LIFE Basic Plan will be reduced when the combined balances in your CPF accounts, including the amount committed to CPF LIFE, falls below $60,000.This is due to the reduction in any extra interest earned and paid to you.

    Martin Lee says a couple of years ago

    Hi May, sorry I missed out your comment. From the CPF handbook:

    On your 55th birthday, we will create a Retirement Account for you. Savings from
    your Special Account, followed by your Ordinary Account, up to your Full Retirement
    Sum of $181,000, will be transferred to your Retirement Account to form your
    retirement sum which will provide you with monthly payouts.

    Your Full Retirement Sum is fixed when you turn age 55 and will not change.
    You do not need to top up your Retirement Account in cash if your savings are
    lower than your Full Retirement Sum. Your monthly payouts will depend on how
    much you have set aside as retirement sum.

    For higher monthly payouts, you may also top up your Retirement Account up to
    the Enhanced Retirement Sum of $271,500.

sender says 12 years ago

Hi lioninvestor,

say my age is 50. When i reach 55, is it compulsory that i must choose one of the 4 cpf-life plan? Can i wait until 65 to decide or don’t opt in at all? What are the consequences of delayed participation?

thanks in advance.

    lioninvestor says 12 years ago

    Dear sender,

    The CPF life will become a more or less compulsory scheme for those born 1958 and onwards unless you have less than $40k in your retirement account. Can’t choose to opt-in or out. We will only have the choice of choosing 1 of the 4 options.

    1) Automatic inclusion:

    Upon reaching age 55 if you have at least $40,000 in RA; or
    Upon reaching your Draw Down Age (DDA) if you have at least $60,000 in RA

    2) Opt to join after reaching age 55 if you do not have at least $40,000 in RA

Intheknow says 13 years ago

all so confusing…

causing less sophisticated elderly folks to possibly make wrong decision?

lion.. you sure 100k at 4% compounded over 10 years can YIELD 148k? or end up with 148k (yield 48k)…

    lioninvestor says 13 years ago

    I mean end up with $148k – capital and interest.

steve says 13 years ago

CPF life is another government scheme that would take money from unsuspecting Singaporeans. I am 56 year old and IF I joined now and I choose the income option where 100% of my retirement account [say $100k] would be transfer to pay for the annuity immediately I would have lost 36k [4% x 9 years] in interest earned in my RA before the monthly payout start at 65 year old. The better choice for Singaporean like me would be to join CPF life just before I turn 65 year old as I would have 36k more in interest earned. The implication would be with this $36k more money in buying the annuity, I would receive higher monthly CPF life payout in future.

Why is this pitfall not make clear in the CPF FAQ is perhaps another example of “let the buyer beware!” mindset that our leaders adopted in their policy of conceiving the scheme, or it could be another example of complacent civil servants failing to see the consequent of encouraging the public to enroll in CPF life now to make the scheme with higher public participation.

At the CPF life seminar, the CPF staff emphasize that members who joined now will receive $2k bonus. What was not told is that this $2k is pay out over 20 to 30 years in your monthly payout and would amount to less than a couple of cents more in monthly payment to you.

    lioninvestor says 13 years ago

    Hi Steve,

    Actually 100k compounded at 4% will yield almost 148k (and not just 36k) after 10 years. However, your assumption is a bit incorrect as joining CPF Life at age 55 with $100k should give the same monthly payout as joining CPF Life at age 65 with $148k.

    The main difference is that if you opt for the highest income plan at age 55, your estate will be left with nothing should you pass away within that 10 years compared to those who wait and leave everything inside CPF RA.

      lioninvestor says 13 years ago

      Sorry I used age 55 instead of 56 in my calculations but the theory doesn’t change, just that the numbers will be slightly off.

      Steve says 13 years ago

      How do you know that the monthly pay out would be the same under the 2 scenarios? When a person join now his $100k is transfer to a life fund which may or may not provide a yield of 4% per annum. The chance is that it is lower since the fund need to provide for the less contributing members.

      As you mentioned correctly if we join now and kick the bucket before 65, our beneficiaries would lose out on the interest earned. CPF board should disclose this fact in it’s FAQ and this is a material points for Singaporeans to make the right decision. It seems that those who are tasked to roll out the scheme chose to ignore it fearing it’s disclosure may jeopadise it’s implimentation.

        lioninvestor says 13 years ago

        Hi Steve,

        Both the RA and CPF Life use the same formula – yield of the 10YSGS + 1%, to determine the interest rate.

Intheknow says 13 years ago

thanks lion for taking the time to post this.

i feel much more relieved knowing it is going to be 10% of the Minimum Sum instead of 10% of my entire CPF savings.

I am definitely going for the lowest tier CPF life plan because I think CPF life is a load of b**lcr*p to trap our money!


    lioninvestor says 13 years ago

    Well, we never know how the rules might change later. And what the MS will be by the time we reach 55. 🙁

Garrett says 13 years ago

Sorry, but how much additional premium will be deducted upon reaching DDA? Just to confirm there is 2 deductions, one at 55 (Min Sum Age) and another at 65 (DDA)??? This is new to me….

Garrett says 13 years ago

In other words, for one who does have a long life expectancy, it is advisable to choose the Basic Plan (lowest Annuity Premium), as the interest on the Annuity Premium is not paid out to one’s beneficiaries ya?

    lioninvestor says 13 years ago

    In theory yes, but the irony is that they structure it in such a way that the lowest annuity plan also gives you the lowest monthly payout. So your beneficiaries would benefit the most, and not yourself.

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