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Growing your CPF Retirement Fund (Part 1)

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Bullionstar

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A few weeks ago, I was pleasantly surprised to receive a letter from MINDEF informing me that I was eligible for the 3rd milestone of the NS HOME Awards and that they would credit $5000 into my CPF accounts ($3000 into my Ordinary account and $2000 into my Medisave account). Even more surprising was that due to the award, I have reached the Medisave Contribution Ceiling (MCC), which is currently $48,500. This caused the excess of the MCC to be transferred to my Special Account.

Many Singaporeans, including my wife, are clueless on what will happen to their Medisave accounts when the ceiling is reached. Many people also cannot appreciate the difference between the Medisave Minimum Sum (MMS) and MCC. Ignorance is certainly not blissful when it comes to managing your CPF retirement fund because if you are not given the right information, you may be misled by bloggers trying to stir up negative sentiments.

Before proceeding further, I think it is important to highlight the CPF schemes, especially for those who just started working. Every month, you and your employer will contribute to your CPF accounts which consist of Ordinary Account, Special Account and Medisave Account.

The current contribution rate totals 37%, with 20% deducted from your gross salary and 17% from your employer. Below diagram illustrates the functions of each CPF account:

CPF

Source: http://www.areyouready.sg

Medisave

In this article, I will focus more on Medisave and how it can play a part in our healthcare needs as well as retirement fund. Firstly, there is a maxi​​mum amount you can keep in your Medisave account and it is revised periodically to take inflation into account and expansions in the usage of Medisave. This limit (MCC) can be easily reached by mid-thirties if you have been gainfully employed for at least 10 years after graduation from school. Another important thing to note is that the excess savings in the MA may not always be transferred to your Special Account and it depends on your age and your savings in SA/RA. You can refer to the table below for more details.

Age of CPF Member (Years) Transferred To
Below 55 and have less than the current Full Retirement Sum in Special Account Special Account
Below 55 and have set aside the current Full Retirement Sum in Special Account Ordinary Account
Above 55 and have not set aside your Full Retirement Sum or Basic Retirement Sum (with sufficient property charge/pledge) in Retirement Account Retirement Account
​Above 55 and have set aside your Full Retirement Sum or Basic Retirement Sum (with sufficient property charge/pledge) in Retirement Account ​Ordinary Account​

Source: CPF Website

Besides the maximum Medisave amount (MCC), on the other hand, there is also the minimum Medisave amount (MMS) that you need to take note as well.

Currently, CPF members need to set aside the Medisave Minimum Sum (MMS) in their MA when they withdraw their CPF monies after turning 55 years old. ​The current MMS is $43,500. When CPF members make a withdrawal after turning 55 years old and do not have $43,500 in their MA, they would have to top up their MA using part of the balance in their Ordinary and/or Special Account before they can withdraw the remaining amount.

Changes to Medisave with effect 2016

However, from 1 January 2016, the MMS will be removed. You will no longer be required to top up your MA before withdrawing your CPF monies from your Ordinary Account (OA) and Special Account (SA) upon reaching 55. This will provide you greater certainty on the amount you can withdraw from your OA and SA after you turn 55.

At the same time, the MCC will be renamed as the Basic Healthcare Sum (BHS). The BHS is designed to be enough for a CPF member’s basic, subsidised healthcare needs in old age. Amounts above the BHS will be transferred to your RA if you are above 55 and to your SA if you are below 55. If your RA or SA have reached the current Full Retirement Sum, any excess will be transferred to the OA, similar to the MCC.

The BHS will be set at $49,800 on 1 January 2016 and it applies for all CPF members. The BHS will be adjusted yearly in January to keep pace with the growth in Medisave used by the elderly. Each cohort’s BHS will be fixed when they turn 65, and this amount will not change for the rest of their lives. Therefore, all members aged 65 and above in 2016 will have the same BHS of $49,800 for the rest of their lives.

What do all these mean for you?

Many Singaporeans’ perception is that they would never be able to attain the Full Retirement Sum before 55 years old without pledging their properties. Actually, this cannot be further from the truth. For my case, the matter of fact is that conservatively, I would be able to set aside the current Full Retirement Sum in my Special Account within 10 years, at the age of 45 years old. This is because I have reached the Basic Healthcare Sum and the excess amount would flow into my SA automatically. Even if my private insurance shield plan premiums increased every year, the reductions will be offset by the compounded interests and job performance bonuses.

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