9 Reasons to Top up Your Child’s CPF Account

This was originally posted on Planner Bee.

Being a parent is never easy. Other than taking care of your child’s emotional needs, you also have to look after their physiological needs. In today’s modern society, the concept of physiological needs relate to more than just water, food, and shelter for survival – it also translates to money.

Fortunately, there’s always the Central Provident Fund (CPF) for us to turn to. In fact, you can even turn your child into a half-millionaire by the age of 40, if you start contributing to your child’s CPF account now.

Not convinced? Here are nine reasons you should top up your child’s CPF account:

1. Utilise funds in your child’s CPF account for their education

As a parent, you may not think of utilising the funds in your child’s CPF account. However, instead of saving the funds till their retirement age of 63 (Singapore’s retirement age at present), you can actually tap into these funds for their well-being.

While parents typically pay for their child’s tertiary education through their own CPF Ordinary Account (OA), there’s no reason why your child can’t foot their polytechnic and university fees if they have enough funds. Under the CPF Education Loan Scheme, your child can use the funds in their CPF OA to pay for their tertiary education.

Furthermore, topping up your child’s CPF account can help maximise their Child Development Account (CDA). For the uninitiated, the CDA is part of the baby bonus scheme to assuage parents’ financial load of bringing up a child.

For a start, the Singapore government will put in S$3,000 in your child’s CDA. These funds enjoy an interest of 2% per annum, and can be used for educational and healthcare expenses at Baby Bonus Approved institutions. Unused CDA funds will be redirected into your child’s Post-Secondary Education Account (PSEA) at the age of 13, accruing an interest rate of 2.5% per annum. When your child turns 31 years old, any unused balance in their PSEA will be transferred to their OA.

2. Protect them against life’s uncertainties

Safeguard your child’s future with an Integrated Shield Plan (IP) to offset a significant amount of hospitalisation costs. The premiums can be paid with your child’s MediSave Account (MA) funds, but do note that there is a cap on the amount allowed to be offset from your child’s MA. This amount is known as the Additional Withdrawal Limits, which is capped at S$300.

Find out more about what an IP covers.

3. Earn risk-free attractive interest for an early start on retirement savings

While local banks might be raising interest rates for savings accounts, the interest earned on the lowest tier of savings (S$15,000) is still a meagre 0.75 per annum.

On the flipside, CPF members aged 55 and below get to enjoy the following interest rates:

• Ordinary Account (OA): 2.5% per annum
• Special Account (SA): 4% per annum
• MediSave Account (MA): 4% per annum

Additionally, savings of combined CPF balances below S$60,000 (capped at S$20,000 for OA) will accrue an extra 1% interest. This means that your child will enjoy an interest of 3.5% for their OA, or 5% for their SA and MA per annum. Let’s also not forget the power of compound interest! Even small amounts contributed during childhood can grow substantially by the time your child reaches retirement age. This early start can give them a solid foundation for a financially secure retirement.

4. Hedge against inflation with a long investment horizon

Taking advantage of the long investment horizon can help your child hedge against inflation.

CPF interest is calculated monthly and credited by the next year’s 1 January. This interest then compounds annually, which means that the earlier you contribute to your child’s CPF account (especially their SA and MA), the more their savings will grow over time thanks to compounding interest. The higher interest rates ensure that the purchasing power of their savings is maintained over time.

5. Help them save for the future

With the high cost of living and price of HDB flats in Singapore, it’s never too early to start helping your child save for the future.

When your child is of age to purchase a home, the savings in their OA would have been accrued since they were young, coming in readily to enable them to make the initial down payment for their flats.

6. Turn them into a millionaire

According to 1M65 Movement’s founder Loo Cheng Chuan, you will need S$64,350 in your child’s CPF SA to turn them into millionaires.

Harnessing the power of compounding interest, and the 5% interest per annum on your child’s first S$60,000 in their SA, this S$64,350 will compound to a whopping S$1 million when your child turns 65. Of course, this projection only holds true if you leave the money untouched.

To work out how much you can save for your child, make use of CPF’s Contribution Allocation Calculator. Even if you may not be able to put in a lump sum at once, it helps to contribute a small amount to your child’s CPF account regularly. This would still add up to a substantial amount in the long run!

7. Inculcate the importance of saving in your child

Set your child up for financial success by imparting financial literacy concepts to them from a young age.

Introducing your child to the concept of CPF and regular savings can instil important financial habits and responsibility from a young age. Understanding how their CPF account grows, as well as future benefits, can encourage them to prioritise financial planning and savings as they grow older.

Instead of saving up for a single purchase, sit down with your child to distinguish reasons for spending money. These can be broken down into categories such as money for saving up for something (e.g. the latest mobile phone or a new gadget), money for spending on a daily basis (e.g. food and drinks), and money for the future (e.g. further education or their first home purchase).

Explain how savings are important, and how CPF can be beneficial to their long-term plans. While the latter concept might be difficult to grasp depending on your child’s age, you can even have a lighthearted ‘annual review’ with your child to show them how much their CPF funds have grown year over year.

Teaching your child how to save at an early age gives them a longer time horizon to attain your financial goals, as well as more time to benefit from the power of compound interest.

8. Encourages long-term planning

Regular contributions to a CPF account promote long-term financial planning and stability. As your child sees their CPF account grow, it can encourage them to think about their long-term financial goals and the importance of consistent savings and investments for a secure future.

9. Enjoy tax benefits

Topping up your child’s CPF account through cash can make you eligible for tax relief. The CPF Cash Top-Up Relief allows parents to claim up to S$8,000 per year in tax deductions for topping up their child’s CPF SA or Retirement Account (RA). This can result in significant tax savings, reducing your overall tax liability.

Have peace of mind by leaving a legacy for your child

Of all the things parents do for their children, one of the most important is leaving behind a legacy for them. By contributing to your child’s CPF account, you can be assured that your child will have sufficient funds for their future – be it for medical expenses, housing, or for retirement. By making regular contributions to their CPF account, you’re making a valuable investment in your child’s financial future, setting them up for a lifetime of financial stability and success.

Have more questions about saving up for your child? Reach out to us at [email protected]!