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Tea with Vic: Transferring funds from OA to SA?

Wednesday, April 9, 2014

This is a guest blog that originated as an email from a reader, Vic, who would like to share his concerns with regards to the transfer of funds from OA to SA:

I was quite alarmed by the 34 year old who transferred all his funds in his OA to his SA.

 
a) transfer is not reversible. (Is he aware or are readers aware?)
 
b) by doing so, he has cut off a pool of funds for the purchase of housing in the future. I am not sure if that is a good idea since there are opportunities for housing investment. I assume that this man must be single at this point in time.
 
c) there is a limit to the amount of money that can be given out under CPF Life. So, any amount put in beyond minimum sum, at the Retirement Account (RA) level, you still get 4%. If you do not withdraw money at 55 years of age, the money is stuck there. This happened to my father who is 66 years old.*

He has $144,000 in the RA but can only be given $620 per month. He cannot withdraw the excess. At 4% per year, the interest from the $144,000 is $5,760 but, every year, he can only get $620 X 12 = $7,440.  Net reduction is only $1,680 per year! In spite of this, he is not allowed to withdraw since he skipped the chance at 55. Medisave is full and untouched.
 
Based on this, my father has to live at least 50 to 70 years more to fully benefit from his CPF retirement funds.
 
Some background:
 
1. My father has faithfully contributed the maximum CPF amount every year, partly as a means of tax reduction ever since he was a young man. He is a CPF believer!
 
2. He has withdrawn $800,000 for purchase of condo in 2006. Condo is fully paid up by his CPF funds.
 
Related post:
 
* AK is a bit kaypoh and checked CPF's website on this.
Check it out at: Withdraw CPF savings at age 55.
And also: CPF Life.

So, what we want to do is to withdraw from our CPF account all that we are allowed to withdraw at age 55 and what is left is the required CPF minimum sum which currently stands at $148,000. This will be transferred into our Retirement Account (RA).

Using the CPF Life pay-out estimator provided, assuming that the annual value of our place of residence is less than or equal to $9,500 and that our annual assessable income is less than or equal to $27,000, we could get the following benefits from the Life Standard or Life Basic plans.


Looks good to me as a minimum safety net.

What do you think?

24 comments:

sillyinvestor said...

Hi AK,

I think there is a mistake in the post. You can still withdrawn the excess after 55. Copy from website:

If you do not withdraw your CPF savings immediately at 55, you can still withdraw later!You can withdraw the amount you are eligible for every year on or after your birthdays. For example, if your first withdrawal was at 57, you would then be able to withdraw every year on or after your 58th birthday.Also, you don’t have to take out the full amount at one go. For example, if you
are eligible to withdraw $10,000, you can choose to make a partial withdrawal such as $2,000. However, you can only withdraw the remaining $8,000 (if available) when you are next eligible to withdraw your CPF savings.

-------------------------------
I think the withdrawal is once a year.

(Details here:
http://mycpf.cpf.gov.sg/NR/rdonlyres/C7A3F0C7-F0E7-4B5A-9792-2C07D4B6C119/0/Reaching55_booklet.pdf)

Basically, CPF is your money, you cannot withdrawn it if you do not meet the minimum sum for RA and MMS. If you have excess, it is still your money after 55, his dad might want the 4% risk free interest. Of course, if he can get better than 4%, he should take it out.

AK71 said...

Hi Mike,

I can always depend on you to keep a look out for me. Thanks! :D

I think Vic might want to discuss this with his dad and to find out if he has money in the CPF account which could be withdrawn since the impression I get is that this is what he wants to do.

Of course, if all that the dad has in the CPF is what is required as the minimum sum, then, no lump sum withdrawal is possible.

AK71 said...

The Annual Value (AV) is the estimated annual rent of your property if it were to be rented out, excluding the furniture, furnishings and maintenance fees. It is estimated based on market rentals of similar or comparable properties. The basis of determining the AV is the same whether the property is rented out, owner-occupied or left vacant.

Source: http://www.iras.gov.sg/irashome/page04.aspx?id=2110

AK71 said...

From a reader on FB:

"148,000 is a huge sum for most blue collar workers to accumulate by 65 if they had used it to purchase HDB."

My reply:

"Definitely a challenge and I can understand why they might feel pessimistic which was what a reader recently highlighted to me and I shared it in a guest blog too. However, if they were to manage their expectations when it comes to housing and manage their money prudently, they could still improve their lives, especially if they learn how to invest for a second stream of income."

hydrogenperoxide said...

Hi AK,
Correct me if I am wrong, the process should go as follow when you reach 55:
1. Creation of RA account.

The RA would be created from SA Account + OA Account (SA would be transferred first and later OA), it would stop once it reached minimum sum.

Copied from CPF Q&A

Q: Why are members 55 and above not eligible to transfer Ordinary Account(OA) savings to Special Account(SA)?

A: When members turn 55, a Retirement Account (RA) is created for them and
their CPF Minimum Sum (MS) is placed in this account for their retirement needs. Members who did not set aside the full MS can transfer their CPF savings# to top up their RA. Savings in the RA currently enjoy the same interest rate as the SA.

2. You are able to withdraw the sum anytime if you are not working or receiving any income for the previous 6 months, if you are working, you can do a yearly withdrawal. (Information can be found in CPF withdrawal form)

3. SA would be withdrawn first, then later OA. You cannot transfer OA money to SA after you reach 55. (shitty as I would like to touch my OA first, lol since I cannot add more to SA already).

EY said...

Hi AK,

I suspect the reason why Vic's father can't withdraw his money is because he hasn't meet the minimum sum of $148000. MS does not include Medisave balance.

And for the sample computation that you provided, the payout is based on $148000 transferred to the RA at 55 and drawn down from 65. Meaning that there is a 10 year period lock-in of 4% compounded interest before the draw down. That's why the payout appears to be some 70% higher than what Vic's father is receiving. In his case, at 66 years old, with a balance of $144000, that would translate to having a balance of ~$93500 at 55.

AK71 said...

Hi pero,

Point number 2 is what I need to flesh out this blog post. Thanks! :)

Actually, my mom told me this before but it stayed at the back of my mind buried under tons of random thoughts. I have a consultant at home whom I could have asked but I didn't. -.-"

AK71 said...

Hi Endrene,

You are most probably right. It solves the mystery of why Vic's dad is not able to do any withdrawals.

Vic sent me an email after reading this blog post and using the CPF Life estimator. He was scratching his head. LOL.

I have asked him to read the comments that this blog post has attracted. :)

lzyData said...

If I am not wrong, different minimum sums apply for different people who have already turned 55. According to this table, your reader's father's applicable MS should be $80k. If his balance is $144k and he is no longer working, he should be able to withdraw the excess. Of course, why he would want to is the more pertinent question. Where else can you find a "savings account" giving 4% pa?

http://mycpf.cpf.gov.sg/CPF/my-cpf/reach-55/Reach55-2.htm

hydrogenperoxide said...

Ak, 144k is def below ms. As what endrene mentioned. I think currently the amount above ms is probably the 620? Might be wrong though.. Cpf need to be more youngster friendly.. Hahaha

AK71 said...

Hi IzyData,

I think the best thing for Vic to do is to make a trip to the CPF Board with his dad one day to find out more. Hopefully, he will share with us his findings after the visit. ;p

Indeed, where to find a savings account that pays 4% per annum in interest income? My parents have both chosen to leave their CPF money more or less untouched with this consideration in mind. :)

AK71 said...

Hi pero,

I believe Endrene is most probably right on this. :)

You have a long way to retirement lah. No hurry. ;p

EY said...

Hi AK, Pero and IzyData,


IzyData is right that Vic's dad would have set aside $80000 as the minimum sum when he was at 55.

I just did a calculation using CPF Life Payout Estimator based on $80000 MS at 55 and that gives a payout of $605 - $668 from 65 onwards. The total amount reflected in the RA would have been the compounded amount plus some bonus, I suppose.

Once the minimum sum is locked in at 55 for buying the CPF Life plan, we cannot touch the money even when the compounded interest help to grow the balance to an amount higher than the MS subsequently.

Like AK said, it is still best to seek the advice of CPF staff. I'm also just making some guesses here. Whatever I learnt was from exploring the CPF website and playing around with its calculators. :)

Derek said...

Hi AK,

I'm a bit confused. Am I right to say that Vic is cautioning the 34 yr not to transfer his entire OA into SA and Vic is using his father as an example?

If you are unable to set aside your full MS in cash, your property, bought with your CPF savings, will be automatically pledged for up to half of your MS. I'm not sure how this will affect the payout though.

Just some personal thoughts. I am not in favor of using CPF as my main retirement means because the rules keep changing e.g. increasing the MS and withdrawal age. CPF is still a valuable component in one financial planning and I would rather look at how best I can take the money out of CPF to maximize its returns than to lock it in or top up cash.

Cheers!

AK71 said...

Hi Endrene,

You are a lady of many talents and I just discovered another tonight: forensics accounting! ;p

AK71 said...

Hi Derek,

I think Vic is using the example of his dad for the purpose of showing how the CPF is restrictive when it comes to withdrawal of funds in our old age but I think Endrene just solved the mystery. ;)

Vic is probably against a 100% transfer of OA funds to the SA for the few reasons he listed in the first half of his email. They are valid reasons.

All of us have to evaluate the options which are available and decide if they are relevant to us. For sure, there is no one size fits all solution.

Definitely, the CPF is a minimum safety net for all Singaporeans. It will never be enough, I suspect. So, as financial bloggers, we have an important job to do! ;)

hydrogenperoxide said...

Anyway, there's also distinction to be made between ra and sa.. Always thought about ra being oa plus sa after we turn 55.. Cpf board are also not stupid and kind enough to let people utilize this 4% p.a. As oa is the last to be drawn. We should all ask for more.. I think vic would need to check whether it meant ra or oa and sa too.. :) Hahaha

Ending said...

After 55, let say at 60, if you have money in OA, you can withdraw any excess if you have set aside Minimum Sum and Medisave Minimum Sum.

The important thing to note is that Medisave Minimum Sum is not cohort-based. Now it is 40.5K, but when it increases in future, the new amount applies to you even though you belong to the cohort that turned 55 some years ago.

That's why I prefer to withdraw all that I can even if OA 3.5% interest is attractive.

Cory said...

When i try to calculator, I am surprise that

1. Annual Value of Property
2. Annual Assessable Income

play a part in how much you can get monthly ... interesting. not sure why CPF includes them. should they base it purely on how much you have with them ?

AK71 said...

Hi Cory,

I suppose AV helps to determine how well to do a person is while assessable income tells whether a person needs more supplementary income or not. My guess is that CPF Life tries to give what is an optimum amount to each CPF member but I am pretty sure the yardsticks and whether they do a good job are debatable.

BP said...

I remember when the life scheme just introduced, those past a certain age had a choice to withdraw even without meeting the minimum sum.

so I believe that's the reason why he said he couldn't withdraw, because he chose to opt in for CPF Life.

lzyData said...

Um, I think the Annual Value of Property and Annual Assessable Income are only used to calculate the L-Bonus that certain people are eligible for. Otherwise it should not play a part in the calculation.

AK71 said...

Hi Izydata,

Thanks for this. I checked up on the L-Bonus:

"The amount of L-Bonus that a member is eligible for is dependent on his age, the balance in his Retirement Account which would be committed to CPF LIFE, his annual Assessable Income (AI) and the Annual Value (AV) of his home."

Read more:
http://mycpf.cpf.gov.sg/NR/rdonlyres/5043B15D-B867-4F8E-99A1-878B88E8F0B7/0/LBonus.pdf

Cory said...

"The amount of L-Bonus that a member is eligible for is dependent on his age, the balance in his Retirement Account which would be committed to CPF LIFE, his annual Assessable Income (AI) and the Annual Value (AV) of his home."

what i can deduce is, if you have better rental property and has good income before RA, get a little less per month ... but the difference seems very minor.

Can't they just keep it simple...

Is someone creating job ?

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