A Beginner’s Guide to CPF

As a curious adulting Singaporean boy, I started reading up about what and how CPF works. I think as Singaporeans we would have heard roughly what CPF is but do we really know why does it exist, how it works and how we can use it?? Here’s a quick brief article that is going to explain what CPF is in very laymen terms.

What is CPF?

A quick google will give you this:

The Central Provident Fund (CPF) is a comprehensive social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. It also addresses healthcare, home ownership, family protection and asset enhancement.” – www.cpf.gov.sg

Basically CPF is a savings system that helps you to pay for basic things that require a lot of money, pay for your health and prepare you for retirement.

How does CPF work?

When you work, you will get a salary. This is known as your Gross Salary. Then, from your gross salary, 20% will be put aside into your CPF. What you are left with is called your Take-Home Salary. Of course there is still Income Tax, but that’s for another day.

In addition to the 20% that is put into your CPF, your employer will also contribute 17%. This essentially means your employer is doing contribution match of 85 cents for every $1 you contribute. In financial terms, this means free money!!

Note: This is only until you reach 55 years old. After that, the percentage changes.

CPF Allocations

Okay so now we have this 37% inside your CPF. They will then be split into different accounts. There are 3 accounts when you first start. Here are the accounts, the interest they generate and what you can use them for:

  1. Ordinary Account (OA, 2.5%) – housing, approved insurance, investment and education
  2. Special Account (SA, 4%) – old age and investment in retirement-related financial products
  3. Medisave Account (MA, 4%) – hospitalisation expenses and approved medical insurance

You might ask how much is allocated for each account. The tricky part is that it is different for different age group, so here’s a visualisation:

Age Ordinary Account Special Account Medisave Account
35 and below 23% 6% 8%
35 to 45 21% 7% 9%
45 to 50 19% 8% 10%
50 to 55 15% 11.5% 10.5%
55 to 60 12% 3.5% 10.5%
60 to 65 3.5% 2.5% 10.5%
Above 65 1% 1% 10.5%

Note: As per my note previously, you would only get 37% if you add them up only until 55. After 55, it decreases.

As you can see, the allocation changes as you grow old. Although I’m not sure how they calculate to use these numbers, it does make sense. As you grow older, the amount of money you need to buy a house or get an education should decrease so OA decreases. As for SA, it goes up then goes down. By the time you are 55, the bulk of money that is in that account would have been created by the compound interest that it generates. As for MA, as you grow older you tend to fall ill or get into small accidents more easily so having more money to pay for your medical bills is important.

What I Like About CPF

Personally I see CPF as a good back up plan. I do my own investments but those are high risk high reward. And if it fails, I know I can fall back on CPF. Here are some things I like about CPF as a system itself:

  1. Interest Rates
    Not only is the interest rate high, it is a “confirmed” return on investment. In the outside world, to get a confirmed ROI usually means something like savings account or cash deposit. But these range around 1% to 2% interest rates. So 2.5% for OA and 4% for SA and MA is a very high, especially when you factor in compounding effects.
  2. Employer Match Contribution
    As stated above, your employers match the contributions of 85 cents for every $1 you contribute. So it’s free money for you. The only thing is that you don’t get to enjoy it freely.
  3. Forced Savings
    I think this is something very controversial among Singaporeans. We are forced to set aside part of our salary for our retirement. Think about it, when you receive your salary, do you even set aside savings? Majority don’t have the discipline to do that.
  4. CPF Protected from Creditors
    Under the CPF Act, your CPF money is protected from creditors. This means that if, for some reason, you get into very heavy debt, debt collectors won’t be able to touch your CPF money. Your retirement money will always be safe.

What I Don’t Like About CPF

CPF, like any other system in the world, has its flaws. One huge flaw that I don’t like is that it is very rigid. It is built to be like a one-size-fits-all financial plan for Singaporeans. We are all born different and sometimes we have different needs right from the start when we work. Maybe this is something that can be worked out in the future.

How I’m Planning My Future With CPF

Like I said, CPF is a good safety net for me and I will use it as that. But primarily, I will be focusing on perfecting my investments and building my net worth without taking into account my CPF money.

Closing Words

I must say I’m not an expert on CPF but from what I have researched so far, I think the most important thing to do is figuring out how it works and using it to our advantage. Do some Google-ing and you will find new things to read!!

Articles You Can Read Up More On CPF

  1. https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview
  2. https://blog.seedly.sg/cpf-5-minutes-guide/
  3. https://blog.moneysmart.sg/budgeting/cpf-contributions-singapore-guide-interest-rates-minimum-sum-calculator/