CPFIS-SA INVESTMENT THRESHOLD

The Singapore Central Provident Fund is a compulsory social security savings plan for Singapore Citizens and permanent residents. The original objective of the Central Provident Fund was that of a compulsory savings vehicle to provide for members' retirement needs. However, it has since evolved to cover the following scope:

• Retirement
• Healthcare
• Home Ownership
• Family Protection
• Asset Enhancement

The Central Provident Fund (CPF) is split into 3 different accounts i.e. Ordinary Account, Special Account and the Medisave Account. The purpose of each account is as follows:

• Ordinary Account - the savings can be used to buy a home, pay for CPF insurance, investment and education.

• Special Account - for old age, contingency purposes and investment in retirement-related financial products.

• Medisave Account - the savings can be used for hospitalisation expenses and approved medical insurance.

From 1 May 2009 onwards the threshold for SA monies investment has been raised from current $20,000 to $30,000. Given the higher risk-free interest rate on the Special Account which is subject to a floor rate guarantee, CPF Board decides it is better to be more conservative than to risk the uncertainty of CPFIS returns.

The minimum interest rate on the SA is 4% currently. With the extra 1% interest on the first $60,000 of a member's total CPF balance, the SA interest rate is 5% currently. This is in contrast to the returns from CPFIS, which can be highly uncertain. The changes will not affect members who have already bought investments using their CPF monies.

CPF Life

CPF LIFE is a scheme designed to provide CPF members with a monthly income for as long as they live.

From September 2009, CPF Board will start inviting members from age 55 and above to opt in with the first group of members receiving their LIFE payouts from January 2010.

Four LIFE plans will be offered to CPF members, giving a range of trade-offs between providing for oneself and leaving a bequest for one's beneficiaries. The default plan will be the LIFE Balanced Plan which provides a member with a moderate level of income during retirement, and balances the bequest amount available for his beneficiaries upon his demise

How does this work?

Upon a member's enrolment into CPF LIFE, a portion of the cash

Savings in his Retirement Account (RA) will be set aside as the premium for an annuity. Combined with the remaining cash savings, the member will get a lifelong monthly income from his Draw Down Age (DDA).1 For refundable plans, depending on the member's age when he passes away, his beneficiaries would be able to receive a bequest amount, i.e. the remainder of this CPF savings and unused LIFE premium, minus payouts already made. The monthly income from CPF LIFE will be adjusted from time to time depending on interest rates and changes in life expectancy. Higher interest rates earned by the CPF LIFE fund will increase the LIFE monthly income while an improvement in life expectancy will lower the LIFE monthly income.

The views expressed in this article reflect the personal views of the writer. The information provided herein is general in nature and does not have regard to the specific investment objectives, financial situation or the particular needs of any person. Professional Investment Advisory Services Pte Ltd and its affiliates, directors, associates, connected parties, employees and/or representatives may own or have an interest in the securities covered in this article. This article shall not be construed as an offer or solicitation to buy, sell or subscribe for any investment product and collective investment scheme or the giving of advice thereof.