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2016 changes to the CPF and SRS for a better retirement.

Saturday, January 2, 2016

I was reading the papers on changes to the CPF and SRS which took effect on 1 Jan 2016 and thought to myself that working Singaporeans are a lucky bunch.

If you are a middle income worker, rejoice because mandatory CPF contributions by both employer and employee per month are now based on a higher salary ceiling of $6,000 a month instead of $5,000 a month. Your CPF savings will grow at a faster clip.

If you are a worker between 50 to 65 in age, your employer will now contribute an additional 0.5% to 1% based on your monthly wage into your Special Account (SA). 

If you are 55 years old or older, you will also receive an additional 1% interest on your first $30,000 in CPF savings which means you get 6% interest per annum, risk free!

It would be a good idea for younger readers to communicate this change to their parents. If at all possible, consider topping up your parents' CPF SA or MA if they do not have that first $30,000 in their accounts. 

We really should not pass on a 6% annual return from a AAA rated sovereign bond!


A comfortable retirement need not be a dream.

As for the SRS, the ceiling is raised to $15,300 for Singaporeans and PRs. It is $35,700 for foreigners. So, if you pay plenty of taxes each year, this is another tool to help pay less in income tax.

I think it is important to count our blessings and not keep complaining. Probably, there is more than a handful of people who think that the changes are not good enough. Fion Lau, 41, said that the changes do not go far to provide retirement adequacy.

Well, I would like to remind Fion that the CPF is, like I always say, a cornerstone in our retirement adequacy strategy. It is not the entire foundation.

Related posts:
1. SRS: A brief analysis.
2. Retiring before 60 is not a dream.
3. Retirement: Buy a AAA rated bond.

13 comments:

AK71 said...

This fund outperformed the markets in 2015, but you're probably not allowed in. Unless you're Singaporean or near enough.

Singapore's Central Provident Fund (CPF), a mandatory retirement savings plan open only to the country's citizens and permanent residents, offered its usual, steady 2.5 percent-to-5 percent payouts, depending on the nature of members' balances.

But that compares with an essentially flat S&P 500 year-to-date and a near-15 percent drop in the Singapore Straits Times Index over the same period. Other assets haven't done well either: The SPDR Barclays High Yield Bond Exchange Traded Fund (ETF) has mirrored a tough year for junk bonds, dropping more than 12 percent year-to-date.

Singapore's private residential property prices have ticked lower as well, falling 1.3 percent on-quarter in the third quarter after slipping 0.9 percent in the previous quarter.

All of these factors made the CPF a much more attractive prospect that one might have imagined, for those eligible to save with it.


Source:
http://www.cnbc.com/2015/12/30/singapores-cpf-saving-plan-beat-markets-in-2015-with-steady-returns.html

Unknown said...

My parents are >60 and they do not have any money in their CPF. Please advise me how to help them, as well helping myself with CPF contribution? Thanks.

AK71 said...

Hi Unknown,

I won't give you any advice but if you are interested in my thoughts on the CPF and how Singaporeans and PRs can benefit fully from it, search ASSI for past blog posts on the CPF. ;)

As for your elderly parents, check with the CPF Board if they have CPF accounts or not. If they have, you could top up their accounts. If they don't have, you might want to see if you could open accounts for them.

ThinkNotLeft said...

Hi AK, Maybe there's one more change -- the SA cap for voluntary contribution is risen to $240K (ERS) but you do not get tax reliefs for top-ups beyond $161K (FRS).

AK71 said...

Hi TNL,

Thanks for adding. That Top Up to the ERS would be something members who are 55 years or older might want to consider. Younger members can only top up to the FRS.

HnGDreams said...

can top up parent SA or MA or RA account when they have retired? mother had hardly any money in there since she don't work. Will get tax relief?

AK71 said...

Hi HnG,

Yes, I believe you can. You might want to visit CPF's website (the form is available for download) or give CPF Board a call for more details.

I believe you will also get income tax relief if you contribute to their SA or RA if they are unemployed.

K said...

Hi AK,

The other day my friend asked me a question about SRS which puzzled me. His wife (45 years old) is a homemaker but is receiving a nett rental on an investment property of $60k/year. Assuming, she continues to receive this rental (increasing YoY due to inflation) way past 62 years (withdrawal age of SRS without penalty), does it make sense for her to contribute into SRS every year until 62?

My gut feeling is that it will NOT because her SRS investments would have appreciated (~5%/yr) and will be taxed at 50% when she withdraws it after 62. Even after 62 years old she will still need to pay tax because she is receiving rental income and her SRS investments value would have appreciated. She saves on taxes when she contributes to SRS but may end up paying even more when she withdraws it starting from age 62?

Can you help me by confirming this is true? Would be great if you can give an example on when SRS will not benefit someone.

Thanks.

AK71 said...

Hi K,

Well, the SRS is a tax deferment tool.

When we do withdraw money from the SRS, we pay half of the prevailing income tax rate. So, if we withdraw $40K or less a year and if we do not have other sources of taxable income, we don't have to pay any income tax.

If someone at age 62 has significant sources of income which are taxable, then, there is no need to withdraw his or her SRS money. It is not mandatory to start withdrawing from our SRS account at age 62. That is just the earliest age allowed to start doing so. ;)

K said...

Hi AK,

I do not follow your comment. Ultimately, it has to be withdrawn and taxes need to be paid. Question still remains if it is better to pay the taxes upfront or defer them. That is what I need help to get an answer.

Thanks.

AK71 said...

Hi K,

I would always choose to defer, if given a choice. A dollar today is worth more than a dollar many years in the future. ;)

Also, SRS money doesn't have to be withdrawn if we don't need the money. We can always leave it to our beneficiaries. There is no inheritance tax in Singapore anymore. :)

K said...

Hi AK,

I follow your train of thought.. However, I remember reading in some article that if you invest your SRS funds and get returns more than 5%, you will actually end up paying more tax than just keeping your money out of SRS to invest. This is because there is a tax on profit when you withdraw. In this true? Is there a simple way to calculate the breakeven point?

AK71 said...

Hi K,

Yes, that is true.

So, if you refer to related post number 1, Matthew Seah offered an elegant solution. Withdraw $40K a year over 10 years (non-taxable) if there is no other income from age 62 and buy an annuity with anything above $400K in the SRS. ;p

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