In the Budget 2024 announcement, Deputy Prime Minister Lawrence Wong announced some changes to the CPF rules. The main change of interest (pun intended) was the closure of the CPF Special Account (SA) when the CPF member turns 55.
Currently, at age 55, the CPF Retirement Account (RA) is created, and funds from the Special Account (SA) are transferred into the RA up to the Full Retirement Sum (FRS). If there are insufficient SA funds, then funds from the Ordinary Account (OA) are used to make up the difference.
The new change will see the SA closed at the same time. Any remaining funds in the SA will be transferred to the OA. This will take effect from 1 January 2025. Here’s how this change will improve the way CPF works.
#1 Solving The Problem Of Paying High Interest Rates On Liquid Funds
Since the purpose of the SA is retirement savings and investments, it was designed to lock in funds for the long term to earn a higher guaranteed interest rate.
However, this changes at age 55. Since funds can be withdrawn from the SA at age 55 and above once CPF members have set aside the required funds needed for their RA, the SA essentially turns into a high-interest short-term savings account. Assuming that the FRS is met, funds remaining in the SA continue to earn 4% p.a. and can be withdrawn at any time.
With the closure of the SA after age 55, the remaining funds that isn’t used to top up the RA will be channelled into the OA that would earn a base interest rate of 2.5% p.a.
Read Also: Complete Guide To CPF Retirement Account
#2 Closure Of Loopholes
The CPF Shielding Hack involves putting SA funds into investments shortly before turning 55 to prevent the funds from being channelled into the RA. These funds will return to the SA once divested and continue to earn the higher 4% interest rate and can potentially be withdrawn.
This loophole allows individuals to keep funds in the SA instead of transferring them to the RA as intended by the system. However, more people keeping funds in the SA means increased payouts of high interest for liquid funds, which could become increasingly unsustainable.
Closing the SA after age 55 is a tidy resolution to this issue. Members who had topped up their CPF funds intending for it to earn high interest can still transfer it into the RA up to the ERS to get higher CPF LIFE payouts. The remaining funds can be withdrawn to be invested or kept in the OA to continue earning the 2.5% interest rate.
Read Also: Guide To Using Robo Advisor Fixed Deposits
#3 More Funds Go Into CPF LIFE
Under the old scheme, CPF contributions from salary will still enter the SA rather than the RA, which means that unless the CPF member makes a transfer from the SA to the RA, the funds will remain in the SA. The SA funds could also be withdrawn and never end up in the RA.
From 1 January 2025 onwards, after the SA is closed at age 55, the monthly CPF allocation to SA now directly goes into the RA.
The result is that more funds enter CPF LIFE, which ensures higher payouts for each individual. Since CPF LIFE ensures lifelong payouts for all members using the interest accumulated by all CPF LIFE members, having more funds in CPF LIFE overall will mean more stable risk-pooling.
Read Also: What Happens To Your CPF Contributions After You Hit Full Retirement Sum (FRS)?
#4 Everyone Continues To Have 3 CPF Accounts
The 3 CPF accounts have distinct purposes. The OA can be used for some expenses such as housing or education, MediSave for healthcare, and SA to boost retirement funds. The fourth account, the RA, is created at 55, but its purpose overlaps with the SA at this point, despite having different rules for operation.
Rather than having two separate accounts with different rules and treatments, it is more administratively straightforward to close the SA after 55 and have its funds channelled to the RA and OA respectively.
As an additional benefit, members’ SA contributions now flow directly into the RA rather than requiring a transfer.
Read Also: CPF LIFE VS Retirement Sum Scheme (RSS): What’s The Difference?
CPF Monies Can Still Be Separately Invested
According to Manpower Minister Dr Tan Lee Seng, some 720,000 CPF members have withdrawable SA balances, with about 8,400 unable to fully transfer their SA savings into their RA. Since the remainder is now transferred to OA after the closure of the SA, those affected are effectively losing 1.5% in interest every year on the balances that would have previously resided in the SA.
Rather than leaving the money in OA, this sum of money could be withdrawn and invested in other instruments such as T-bills or Robo Advisor Fixed Deposits. These instruments are relatively shielded from market fluctuations, while providing a higher interest rate than the OA. Robo Advisor Fixed Deposits such as StashAway and Syfe provide guaranteed returns of between 3.3-3.8% p.a., which is only slightly less than the interest rate of the SA.
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Read Also: 8 Things To Know About The CPF Enhanced Retirement Sum (ERS)
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