CPF LIFE is Singapore's national longevity insurance annuity scheme. In Part 1 & 2 of our CPF LIFE series, we explained how CPF LIFE works and why CPF LIFE is better than its predecessor, Retirement Sum Scheme and other private annuities when it comes to hedging longevity risk - the risk of you outliving your economic resources.
Related:
As good as it may be, there is a limit to how much you can get from CPF LIFE. In part 3 of this CPF LIFE series, we'll look at how we can maximize the payout from CPF LIFE to help negate the cost of ageing.
Strategy to maximize CPF LIFE payout
A lot of whether you should and how to maximize payout from CPF LIFE depends on the tradeoff between enjoying the money now and protecting against longevity risk.
In determining the strategy to maximize payout from CPF LIFE, we are going to make two major assumptions.
Assumptions
At the time when you make your decision,
(1) Extra money is good to have but you don't really need the money in the near future; and
(2) You are going to try to live healthy for longer and thus, hedging longevity risk is the key priority when it comes to CPF LIFE.
These assumptions are critical to our discussion on maximizing CPF LIFE payout. If you need the money for survival or more important priorities at the point in time when you are making your decision, maximizing CPF LIFE payout - a benefit that you will only get in future, may not be the best decision.
Given the assumptions, here are some factors that you can control to maximize your payouts.
Defer payout
Choose escalating plan
Aim for the CPF LIFE premium cap
We will explain each of these in turn.
Should I defer my CPF LIFE payout?
Yes. When you reach 65 years old, you can choose to start payout or defer till up to 70 years old. For each year that you defer, your payouts will increase by up to 7%. This means that if you choose to defer until age 70, your payouts will increase by up to 35%.
The tradeoff or what you are giving up for the higher payouts are:
(1) 5 years worth of payout; and
(2) a higher payout that has less value today (time value of money)
Given the assumptions (you don't need money now and hedging longevity risk is key), deferring will payoff in the long run. It's a gamble but probably a gamble you have some control over and worth aiming for.
CPF LIFE: Should I choose Standard Plan or Escalating Plan?
Choose Escalating Plan if you can.
Here's a refresher:
Standard Plan - Fixed/Same payout every month
Escalating Plan - Payout that increases by 2% every year
Given the inflationary environment now, you should have experienced a noticeable increase in price of your favorite chicken rice or noticed that that plate of chicken rice has now shrunk significantly in size compared to a few years back.
While CPF LIFE's Escalating Plan and its 2% increase in payout is not a full-proof protection against inflation, it helps.
The tradeoff of choosing Escalating Plan over Standard Plan is that initially, you will get a smaller monthly payout. But because your payout under Escalating Plan increases 2% every year, at a certain point, the payout under Escalating Plan will exceed the constant payout from the Standard Plan.
What Is The Maximum Amount I Can Put In CPF LIFE?
In short, the cap on CPF LIFE premium is the Enhanced Retirement Sum (ERS) and any accrued interest.
What this means is that in order to put in the maximum amount of premium for CPF LIFE, you need to have the ERS when you are 55 years old and let it grow.
Here's the detailed explanation.
As a working adult in Singapore, your CPF will have the Ordinary Account (OA), Special Account (SA) and MediSave Account (MA). When you turn 55, a Retirement Account (RA) will be created and you will need to set aside a retirement sum in your RA. The retirement sum you need to set aside is determined when you turn 55 and is fixed for life.
Once the retirement sum is set, the money is transferred from your SA, followed by OA, to the RA and you can use the amount you have in the RA to join CPF LIFE.
How much retirement sum needs to or can be transferred depends on several factors and this is where we need to introduce the Basic Retirement Sum (BRS), Full Retirement Sum (FRS), and Enhanced Retirement Sum (ERS).
Note:
FRS = 2 times BRS
ERS = 3 times BRS
If you own a property that can last you up to 95 years old, you can choose to set aside the BRS. BRS is meant to provide you with monthly payouts during your retirement that cover basic living expenses. You can check out how BRS is calculated here. In 2022, BRS is set at $96,000 and you can find the full table here.,
*Note: It is not compulsory for you to set aside the BRS and you do not need to top up the shortfall with cash or sell your property for the BRS. You will just get payouts (if any) from the existing amount in your RA.
If you don't own a property or wish to receive higher monthly payouts, you can choose to set aside up to FRS, which is 2 times of BRS, from your SA/OA.
If you wish to put more in your RA and receive even higher payout, you can choose to top up (in cash and/or via CPF transfers) your RA to the ERS amount, which is 3 times of BRS. See more information on top ups here.
Note: Your FRS is fixed whereas your ERS, the maximum you can top up, increases to the prevailing ERS every year.
CPF LIFE premium floor & cap
The prevailing ERS plus any accumulated interested in your RA is the maximum amount of CPF savings that you can use to join CPF LIFE. There is no minimum required amount to join CPF LIFE.
The key trick to maximizing CPF LIFE payouts
What this really means is that in order for you to put in the maximum amount for CPF LIFE allowed by the government, you have to have the prevailing ERS at 55 years old and let it accumulate interest. At the same time, you should, if you can, top up whenever ERS increases to fully capitalize on the interest that can be earned.
You can't wait till you are 70 years old to put in the ERS + interest because the maximum that the government allows you to top up for your RA is to the prevailing ERS.
Note: Matched Retirement Savings Scheme
If you are a senior and your RA has less than the BRS, the government may match your top up to up to S$600 a year. The Scheme, which aims to help senior Singaporeans who have yet to reach the current BRS save more for retirement, was introduced in 2021 and will last for at least 5 years.
Check here for your eligibility.
Click here more information on the scheme.
Can I top up CPF LIFE after I have started payout?
Yes. There is no age limit for making or receiving (from your family) top-up. You can continue to top up as long as you have available top up limit.
Top up limit = Current ERS - Your RA savings
Your RA savings =
Cash set aside in RA (excluding interest earned, government grants) +
Amount withdrawn (eg monthly payout, lump sum withdrawal at an eligible age)
You can also find your top up limit in your CPF Retirement Dashboard.
Conclusion on maximizing CPF LIFE payout
In summary, in order to maximize your CPF LIFE payout, you should:
Try to have the Enhanced Retirement Sum (ERS) in your RA when you are 55 years old;
Top up annually when the ERS increases;
Defer your payouts till 70 years old; and
Choose Escalating Plan for your CPF LIFE payouts, if you can
But wait! I am deferring my gratification now to protect my old age. What if I fall sick and need the money? Can I get out of CPF LIFE?
Can I cancel my CPF LIFE after I join?
Yes but only under the following circumstances: :
You have a reduced life expectancy due to a medical condition that is certified by an accredited doctor. Severe medical conditions that cause you to be permanently unfit for work or to lack mental capacity permanently can be considered.
You are about to leave or have left Singapore and West Malaysia permanently with no intention of returning to Singapore for work or to live.
You are a Malaysian citizen and have left Singapore permanently to live in West Malaysia.
You are fully exempted from setting aside the retirement sum in your Retirement Account because you are receiving a monthly pension / annuity payout.
Upon cancellation, you will receive a refund of your CPF LIFE premium balance (if any).
What happens to my CPF LIFE premium if I die?
When you start your CPF LIFE payout, the payouts will first be deducted from the CPF LIFE premium that you paid.
If you pass away after your premium has been used up, nothing happens.
If you pass away before the premium has been used up, the unused premium will be distributed to your CPF nominees or intestacy law if you haven't nominate your CPF.
For CPF LIFE, only the unused premium will be refunded to your beneficiaries. The interest accrued on the premium will not. This is in contrast with the Retirement Sum Scheme, where both the remaining money in your Retirement Account and the interested earned are distributed to your beneficiaries.
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FAQs
Is there a cap for CPF LIFE?
Yes. The prevailing Enhanced Retirement Sum plus any accumulated interested in your Retirement Account is the maximum amount of CPF savings that you can use to join CPF LIFE.
Is there a minimum amount needed for join CPF LIFE?
No, there is no minimum required amount to join CPF LIFE.
Are CPF LIFE payouts fixed and guaranteed?
No. CPF LIFE payouts are not guaranteed, but they are designed to be stable. Any adjustments to CPF LIFE payouts are expected to be small and gradual. CPF LIFE is a self-sustaining insurance scheme where payouts are matched to premiums. Guaranteeing a minimum payout would require higher premiums.
How to maximize payouts for CPF LIFE?
To maximize the payouts for CPF LIFE given the assumptions (you don't need money now and hedging longevity risk is key), you should (1) have the Enhanced Retirement Sum (ERS) in your Retirement Account when you are 55 years old, (2) top up annually when the ERS increases, (3) defer your payouts till 70 years old and (4) choose Escalating Plan for your CPF LIFE payouts if you can.
Disclaimer: Nothing in this article or site should be construed as providing legal advice or advice of any sort. The information provided are general in nature and may become inaccurate over time. Please consult a professional for advice.
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