We all got a huge present for Budget 2024: a change in the CPF system. This latest tweak closed a loophole in the system, causing some Singaporeans to potentially earn less interest from their CPF account. And now, just like World Of Warcraft players in full tantrum because Blizzard fixed their millionth exploit, everyone wants to ragequit – which you can’t, because CPF is mandatory and you’ve already put your money in there. So instead, let’s try to understand what’s happening:
CPF shielding and why it was a big deal
Let’s go back to the ancient eons before…well, last week.
It was pre-Budget 2024. Singaporeans were happy and content; many believed they had cleverly hacked the CPF system for more interest, and their retirement plans still involved a villa in Bali, because people overestimate how much they’ll enjoy the sight of drunk Australians on their beachfront.
In this time before the budget change, there was a hack called CPF Shielding. To understand how this works, you need to grasp how your money could be withdrawn from your CPF SA at age 55:
OA – Ordinary Account. This is a CPF account you can use for housing and education, and it has a guaranteed interest rate of 2.5 per cent.
SA – Special Account. This is a CPF account for long term retirement, and it has a guaranteed interest rate of 4.08 per cent.
Note that you can pledge your property to increase the amount you’re allowed to withdraw, but for simplicity’s sake, let’s say assume there’s no property pledge
| Total Savings in OA and SA | Amount You can Withdraw |
| $5,000 or less | All |
| Between $5,00 and your Full Retirement Sum (FRS) | $5,000 |
| More than your FRS | $5,000 or any excess savings above your FRS, whichever is higher |
All clear? Okay, now let’s consider what else happens when you turn 55
Once you’re 55, a Retirement Account (RA) will be created for you. This is the account that’s used to fund your retirement.
(Yes I know we’ve reached a Campbell’s Alphabet Soup levels of acronyms here, but that’s what government bureaucracy is like; bear with me)
To fill up your RA, money is first taken from your SA, and then your OA. So to min-max your CPF, you might do a bit of CPF shielding: you use the CPF Investment Scheme (CPFIS) to invest a portion of your SA elsewhere, before this happens.
(The CPFIS lets you invest in a range of products, from fixed deposits to permitted unit trusts, with your CPF monies).
When your RA is created, your SA is as empty as possible, as you’ve sunk as much of it into CPF investments as you can. As a result, your OA savings will make up the bulk of the funds that go into the RA.
When your CPFIS delivers its returns, it will still go back into your SA; but it’s earning a higher interest of 4.08 per cent, and you can withdraw it at any time.
Still find it confusing? I have good news, and bad news
The good news is, it doesn’t matter if you don’t understand it, because it’s utterly irrelevant thanks to Budget 2024. Starting from 2025, your SA will be closed when you reach 55. Anything in the SA will go right into your RA, and if there’s anything that would remain in SA (e.g., returns from CPFIS), they will be channelled into your OA instead.
The bad news is that you no longer have an easy, near-guaranteed source of 4.08 per cent interest; you have OA’s 2.5 per cent interest at best.
What now?
We stage a massive petition and garner enough signatures that the government rolls back the system…is what I would say if I was 20 years younger and still suffered from excessive optimism.
But we’re in 2024, and in this age petitions have as much effect on governments / corporations as tap water has on vampires. So instead, those of you near retirement might want to look into alternatives with absolute returns, such as bond products; and some of these products may be liquid, so you can still make withdrawals when you need.
If you have any questions about this, shout it out at Single Digit Millionaire, and we’ll see if we can dig up the answers.
