The discontinuation of the Special Account( SA) for individuals aged 55 and above, is set to take effect next year.
Historically, CPF members employed a “shielding” strategy to maximize their savings’ interest income. By transferring funds to their SA, members benefited from a higher annual interest rate of 4.08%, compared to the Ordinary Account's (OA) 2.5%.
However, the upcoming changes will render this strategy ineffective for those above 55, as their ability to keep funds in the higher interest-earning SA will be eliminated.
However, it may be good to understand the likely possible implications of the change.
The cessation of the SA for individuals over 55 could inadvertently result in some CPF members, accruing interest at the OA’s lower rate of 2.5%, if they do not opt to transfer their OA funds to their RA after the SA closure.
Firstly, we may need to note that most members may have met their BRS through their RA, leaving little to no balance in their SA.
This scenario primarily affects those whose retirement planning strategies did not involve actively managing the transfers between their accounts to optimize interest earnings.
It can be well expected that some senior CPF members passively manage their CPF accounts. Consequently, the shift of SA funds to the OA could result in lower interest income for a portion of CPF members, should they decide against transferring their OA funds to their RA following the SA’s closure.
As for those who manage their CPF account, such as those who practice the “shielding” strategy and have met the BRS, they may in a sense, be denied of a long-term, high-interest, low-risk investment option and may opt to withdraw the sum to be invested elsewhere (instead of 2.5% in OA), to avoid transferring their money to the RA.
It is not “the same” to say that after your SA is closed and transferred to your OA you can always transfer it to your RA, to still get the higher 4.08% interest of your closed SA. Because under the SA, you can withdraw all your funds at any time, if you have met your BRS.
In contrast, under the RA, funds can only be withdrawn as a monthly annuity through CPF Life or the old CPF Minimum Sum Scheme.
One should note the "withdrawal anytime after age 65, for those born after 1 Jan 1958" - Additional 20% of your retirement savings, less the $5,000 withdrawable from 55" - "Based on your Retirement Account balance at age 65 and any CPF Life premium balances at 65. Any amount not withdrawn or used to increase your monthly payouts will be transferred to your OA for your future withdrawals in the same month you start your monthly payouts" - "excluding any cash top-ups or CPF transfers as well as government grants such as CPF LIFE Bonus or Deferment Bonus as they are designed to boost your retirement payouts".
Additionally, if you select the CPF Life Standard Default Plan, all accumulated interest from age 65 will be absorbed into the CPF Life pool upon death.
Consequently, most CPF members who wish to leave their accumulated interest to their nominees might opt for the Basic plan, which offers a lower monthly payout, instead of the default Standard plan.
For instance, the accumulated interest lost upon death at age 80, with a Full Retirement Sum (FRS) of S$192,000 (in 2022), could be about S$160,000 (accumulated interest from 65 to 80).
For those deferring their payouts to age 70 under the Standard Plan, the relative loss of accumulated interest upon death may be even higher.
And also, for those who opt for the ERS which has just been increased to up to 4 times of the BRS in the Budget– similarly, the accumulated interest lost may be even higher.
Another possible implication of the change may be that there are 249, 000 CPF members who have invested $5.8 billion( invested sum– not the current value) from their SA, as of 4Q2023. So, for those who liquidate after age 55, does it mean that the proceeds may be returned to the OA( 2.5%), instead of the SA( 4.08%) previously, for those who have met their BRS?
The removal of the SA after 55 may lead to less interest to those who choose not to have their money transferred to RA from their OA, after their SA closure.
For those who choose to transfer to RA- they may arguably, lose the flexibility of withdrawal under the SA after 55, if they have met the BRS.
For those who are working after 55- their CPF contribution portion which goes into SA previously, will now go to OA, at 2.5%, instead of SA's 4.08%, for those who have met their BRS.
For example, with the 1.5% increase in the CPF contribution rate for age 55 to 65- the current 31% contribution rate for age 55 to 60 becomes 32.5%.
Currently for age 55 to 60- 8.5% goes to SA. How much of the 1.5% increase announced in the Budget will go into the OA, for those who have met their BRS, since the SA will be closed?
Leong Sze Hian
