February 19, 2024, 06:41 PM
Budget 2024 saw a plethora of announcements and goodies, including the news that the government is closing the Special Accounts of Central Provident Fund (CPF) members when they turn 55.
It has drawn a strong response online from a small group of people, particularly the financially-savvy.
Making the announcement on Feb. 16, Finance Minister Lawrence Wong explained that this move would "rationalise the CPF system".
Fixing an unintended anomaly
The existence of the CPF Special Account has resulted in an unintended loophole.
Savings in the Special Account earn a guaranteed interest of 4 per cent but the money can be withdrawn on demand after the CPF member turns 55 — and, of course, has their Full Retirement Sum parked away.
“As a principle, only savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate,” said the Ministry of Finance.
For comparison, the CPF Ordinary Account guarantees an interest rate of only 2.5 per cent.
As a principle, savings that can be withdrawn on demand should earn the short-term interest rate, said the Ministry of Finance. Photo by Towfiqu barbhuiya on Unsplash
Furthermore, when CPF members turn 55, the money in their Special Account gets transferred into a newly-created Retirement Account.
There is a limit to how much can be stored in the Retirement Account and it's called the Enhanced Retirement Sum (more on this below), but the important thing is that the Retirement Account also guarantees a 4 per cent interest rate — just like the Special Account.
So, in this way, the Special Account is serving a duplicate purpose (of sorts) for CPF members who turn 55, and this is what the latest policy move is simplifying.
So what is the big deal? Isn't it still status quo? No. Here's why.
One way or another, CPF members give up something
The main group of people who will be affected are the 55-year-old CPF members who have saved their Full Retirement Sum and have excess money.
If you belong to this group and you want to let your money grow, your current options are:
- Keep the excess in your Special Account which earns 4 per cent interest and lets you withdraw the money at any time.
- Invest the money via the CPF Investment Scheme.
Come 2025, these are your options:
- Transfer the excess to your Ordinary Account where your money can be withdrawn at any time but it has a lower interest rate.
- Transfer the excess to your Ordinary Account, then use your Ordinary Account savings to top up your Retirement Account. You'll earn a higher interest but withdrawals are limited, especially if you're born in 1958 and after.
Those affected are mainly 55-year-old CPF members who have saved their Full Retirement Sum and have excess money. Photo by Aleksandr Zykov.
Currently, there is also a limit to how much you can keep in your Retirement Account — the Enhanced Retirement Sum.
In tandem with the closure of the Special Account, the CPF Board will increase the Enhanced Retirement Sum's ceiling in 2025, allowing CPF members to put more money in their Retirement Accounts.
The CPF Board said that with this increase, more than 99 per cent of members aged 55 and older will be able to transfer all their Special Account savings to their Retirement Accounts.
Special Account "shielding"
The policy move also targets a practice called CPF "shielding" or Special Account "shielding".
Generally practised by wealthier CPF members, "shielding" aims to prevent Special Account savings from being transferred to the Retirement Account.
💰 How Special Account "shielding" is done 💸
Before turning 55, the CPF member uses the CPF Investment Scheme to invest as much of their Special Account savings as possible in investment instruments that bear low risks and can be converted back into money quickly.
The idea is to take the money out legitimately and keep it outside the Special Account for a short period of time before bringing it back into the Special Account.
When they turn 55, the remaining money in the Special Account gets transferred into the Retirement Account. But it does not meet the Full Retirement Sum, so the CPF Board transfers money from the CPF member's Ordinary Account instead.
Once that is done, the CPF member divests the investment and returns the money to their Special Account, where it continues to earn high interest.
Practised by a minority, not illegal but risky
CPF members who practise this constitute a minority.
And of course, you have to have enough money in your CPF accounts to even consider this move.
Only 2 per cent of CPF members who were turning 55 in 2021 invested their Special Account monies within six months of their birthday and liquidated the investment six months after.
Revealing this particular statistic in a written Parliamentary response in 2022, the Minister for Manpower Tan See Leng wrote: "Some of them may have done so to prevent their SA monies from flowing into the Retirement Account at age 55."
It's definitely not illegal. While there are those who are savvy enough to make use of this loophole, there are risks that come with it.
In his Parliamentary response, Tan stressed that investments come with costs and risks, and members may lose a portion of their investment monies.
He even went as far as to claim that those who "promote this practice without highlighting the costs and investment risks" might be guilty of mis-selling, adding that they should be reported to the Monetary Authority of Singapore.
Credits for top image: MAS, @joshconsultancy/YouTube, Reddit, Canva Pro.
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