Central Provident Fund (CPF) members were long able to use their funds to buy investment products such as annuities that would provide them a monthly payment for life, but that investing landscape all changed in 2009.
That was the year the CPF Board introduced its own life-long annuity scheme - CPF Life - and similar private products that were once sold to members slowly disappeared from the market.
Private sector annuity providers acknowledge that they opted not to offer such products to CPF members, primarily because CPF Life's payouts are higher for the same amount of savings committed into the annuity.
So how much is the difference? A member who sets aside $279,000 for CPF Life's highest Enhanced Retirement Sum at 55 can expect to get about $2,200 a month from age 65.
A similar private annuity offering this kind of payout would set you back $500,000 to $700,000, going by some products on the market now.
That is not the only difference.
While the payout for CPF Life is fixed and guaranteed by the Government, payouts from private annuities are not and are dependent on the financial performance of the provider.
There are three reasons why CPF Life is the best annuity money can buy.
- Money in the CPF is invested in Special Singapore Government Securities (SSGS), which are not available to the public.
SSGS provide stable risk-free returns that are higher than many financial products in the market.
In other words, the scheme is built to benefit CPF members from the word "go" because the Government wants to encourage all Singaporeans to do their part to plan for their retirement by ensuring that they get safe and fair returns for their CPF.
- As the national social security institution, the CPF Board is able to pool the mortality risk from a huge base of members.
This is something that private insurers will find hard to match dollar for dollar.
- The CPF Board does not aim to make profits, unlike private companies. Not surprisingly, the running costs of CPF Life are the lowest in the market.
Not too late to join
Some seniors who used their CPF funds to buy private annuities two decades ago have written to Invest to express regret at not being able to enjoy the higher returns of CPF Life.
If they had not withdrawn the money and placed it in private products, they would still have the means to join CPF Life.
But it is still not too late.
Seniors who are below 80 can still apply to join CPF Life - you can make an appointment with CPF officers to check on the payouts for the amount you put in.
You should also check the surrender value of your annuities and decide whether it makes sense to cash out and switch to CPF Life if you do not have enough money to join.
Members gain more by doing nothing
If there is a lesson to be learnt from the experience of these seniors, it is that when it comes to CPF, it pays to just do nothing about it.
Those who do not withdraw their money from CPF to invest get to earn the 2.5 per cent to 4 per cent interest. In the current low interest environment, such risk-free returns are quite hard to come by.
In 2016, the Government accepted the recommendation of the then CPF Advisory Panel to start a CPF Lifetime Retirement Investment Scheme that would allow less-financially savvy members to use their funds to buy into specially curated financial products that could possibly provide a higher return than CPF interest.
But this scheme has yet to take off.
Manpower Minister Josephine Teo said last month that the pandemic had changed the investment environment and whatever earlier planning assumptions for the scheme had to be updated.
Mrs Teo added that "there is no magic formula" to helping CPF members earn higher returns, which involves "taking higher risks".
It is prudent to be cautious when it comes to CPF because, for many people, the money there is their last line of financial defence.
Eligible members with sufficient savings can withdraw the money to invest in a variety of products under the CPF Investment Scheme.
But, more often than not, statistics show that most people end up poorer than if they had not done anything with their funds.
This raises the all-important question - should you even consider using your CPF for investment?
CPF is your personal reserve
If you need to use your CPF to invest, chances are you have either overleveraged or have not considered the implication of doing so.
Why risk the nest egg that is guaranteed by the Government to make extra money when you can gain more by using other cash to invest?
If your investment grows, you win double because the money in your CPF is also growing.
Prudent financial planning means having a fail-safe strategy that can bail you out even in the worst-case scenario.
So, do not just think of making more money - think also of how you will live through old age if your investment leaves you poorer.
More importantly, the real issue facing many people today is not whether they can make more money by investing their CPF, but whether they have enough there in the first place.
As it stands, more than half of those in the 55 to 70 age group do not meet the Basic Retirement Sum for CPF Life.
So, if you are keen to make more money, minus the risk, you can actually "invest" in the special government securities by contributing more to your CPF.
Money in CPF is for your future
Many people will think twice if they are told to spend $50,000 to $100,000 in cash to buy an investment product. But they are likely to be less hesitant if the same amount is coming from their CPF, especially those in their 30s or 40s.
As they cannot touch the money there for years, they do not feel as much pain by signing it away.
This is why some investment companies choose to target their potential customers' CPF accounts, because they know it is easier to make them withdraw the funds there than stump up cash.
Before you succumb to such investment tactics, you should know that while the CPF does not give you the best yields when compared with some risky investments, it is totally risk-free and you do not even need to pay any investment charges for keeping your money there.
By all means, if you feel a particular investment has a great potential, put in cash or make it a habit to set aside a portion of your income every month for it.
If you score a winner, you will get to enjoy the rewards instantly.
With CPF, you cannot touch the money until 55, even if you win big.
While a gain is good news, losing your CPF savings in an investment will set you back big time if you do not have huge cash savings.
Ultimately, some things in life are not worth the risk, and one of them is your financial security in old age.
Central Provident Fund (CPF) members were long able to use their funds to buy investment products such as annuities that would provide them a monthly payment for life, but that investing landscape all changed in 2009.
That was the year the CPF Board introduced its own life-long annuity scheme - CPF Life - and similar private products that were once sold to members slowly disappeared from the market.
Private sector annuity providers acknowledge that they opted not to offer such products to CPF members, primarily because CPF Life's payouts are higher for the same amount of savings committed into the annuity.
So how much is the difference? A member who sets aside $279,000 for CPF Life's highest Enhanced Retirement Sum at 55 can expect to get about $2,200 a month from age 65.
A similar private annuity offering this kind of payout would set you back $500,000 to $700,000, going by some products on the market now.
That is not the only difference.
While the payout for CPF Life is fixed and guaranteed by the Government, payouts from private annuities are not and are dependent on the financial performance of the provider.
There are three reasons why CPF Life is the best annuity money can buy.
SSGS provide stable risk-free returns that are higher than many financial products in the market.
In other words, the scheme is built to benefit CPF members from the word "go" because the Government wants to encourage all Singaporeans to do their part to plan for their retirement by ensuring that they get safe and fair returns for their CPF.
This is something that private insurers will find hard to match dollar for dollar.
Not too late to join
Some seniors who used their CPF funds to buy private annuities two decades ago have written to Invest to express regret at not being able to enjoy the higher returns of CPF Life.
If they had not withdrawn the money and placed it in private products, they would still have the means to join CPF Life.
But it is still not too late.
Seniors who are below 80 can still apply to join CPF Life - you can make an appointment with CPF officers to check on the payouts for the amount you put in.
You should also check the surrender value of your annuities and decide whether it makes sense to cash out and switch to CPF Life if you do not have enough money to join.
Members gain more by doing nothing
If there is a lesson to be learnt from the experience of these seniors, it is that when it comes to CPF, it pays to just do nothing about it.
Those who do not withdraw their money from CPF to invest get to earn the 2.5 per cent to 4 per cent interest. In the current low interest environment, such risk-free returns are quite hard to come by.
In 2016, the Government accepted the recommendation of the then CPF Advisory Panel to start a CPF Lifetime Retirement Investment Scheme that would allow less-financially savvy members to use their funds to buy into specially curated financial products that could possibly provide a higher return than CPF interest.
But this scheme has yet to take off.
Manpower Minister Josephine Teo said last month that the pandemic had changed the investment environment and whatever earlier planning assumptions for the scheme had to be updated.
Mrs Teo added that "there is no magic formula" to helping CPF members earn higher returns, which involves "taking higher risks".
It is prudent to be cautious when it comes to CPF because, for many people, the money there is their last line of financial defence.
Eligible members with sufficient savings can withdraw the money to invest in a variety of products under the CPF Investment Scheme.
But, more often than not, statistics show that most people end up poorer than if they had not done anything with their funds.
This raises the all-important question - should you even consider using your CPF for investment?
CPF is your personal reserve
If you need to use your CPF to invest, chances are you have either overleveraged or have not considered the implication of doing so.
Why risk the nest egg that is guaranteed by the Government to make extra money when you can gain more by using other cash to invest?
If your investment grows, you win double because the money in your CPF is also growing.
Prudent financial planning means having a fail-safe strategy that can bail you out even in the worst-case scenario.
So, do not just think of making more money - think also of how you will live through old age if your investment leaves you poorer.
More importantly, the real issue facing many people today is not whether they can make more money by investing their CPF, but whether they have enough there in the first place.
As it stands, more than half of those in the 55 to 70 age group do not meet the Basic Retirement Sum for CPF Life.
So, if you are keen to make more money, minus the risk, you can actually "invest" in the special government securities by contributing more to your CPF.
Money in CPF is for your future
Many people will think twice if they are told to spend $50,000 to $100,000 in cash to buy an investment product. But they are likely to be less hesitant if the same amount is coming from their CPF, especially those in their 30s or 40s.
As they cannot touch the money there for years, they do not feel as much pain by signing it away.
This is why some investment companies choose to target their potential customers' CPF accounts, because they know it is easier to make them withdraw the funds there than stump up cash.
Before you succumb to such investment tactics, you should know that while the CPF does not give you the best yields when compared with some risky investments, it is totally risk-free and you do not even need to pay any investment charges for keeping your money there.
By all means, if you feel a particular investment has a great potential, put in cash or make it a habit to set aside a portion of your income every month for it.
If you score a winner, you will get to enjoy the rewards instantly.
With CPF, you cannot touch the money until 55, even if you win big.
While a gain is good news, losing your CPF savings in an investment will set you back big time if you do not have huge cash savings.
Ultimately, some things in life are not worth the risk, and one of them is your financial security in old age.