What You Need to Know About CPF Contribution Rates in Singapore
It is in the interest of any government to facilitate citizen welfare at any stage of their lives whether young, middle-aged or old. For this reason, many governments come up with numerous programs especially those that are supposed to make sure that people continue to enjoy a decent living even after they retire. Singapore has such a program called the Central Provident Fund (CPF).
Why do CPF contributions exist?
The CPF exists as a retirement savings scheme. It is there so that Singapore citizens can secure their lives after retirement so that they will have enough money to pay bills, afford food and other amenities that they will require in their retirement. Singapore residents are required to pay a CPF contribution as long as they are employed. This applies to Singapore citizens and also those who are permanent residents in the country. Below are some things that you should probably know about the CPF and CPF contribution rates.
Every working citizen in Singapore is required by law to pay the CPF contribution every month. The payment is supposed to be made at the end of every month although there is a 12-day grace period. Employers in Singapore are obligated to deduct the CPF contributions for their employees. This especially applies to those working in the formal sector, and the amount is deducted automatically from their salaries. It is, however, worth noting that self-employed people do not have to contribute anything to the CPF.
The age of the employees determines CPF rates. For example, those under 55-years-old pay 17% of their monthly income while employers pay 20%. Below is a chart that demonstrates the rates paid by the contributors both employee and employer.
Note that the CPF rates are subject to change by the government although the above are the currently prevailing rates. The CPF payment system is structured such that both employer and employee make contributions. This means that employers also contribute to their employees’ CPF.
Judging by the above CPF contribution rates, a person who earns a considerable income will be forced to pay a sizable amount to the CPF. However, that is not necessarily the case because there is a CPF contribution cap which is designed to make sure that employees do not end up having to pay too much. The cap is called the CPF Wage Ceiling, and it has two distinct parts.
- The ordinary wage ceiling is a monthly salary cap that limits the maximum contribution to $6,000. This means that only the first $6,000 from an employee’s salary will be subjected to the CPF contribution. It also protects employers from having to pay too much. In this case, employers only have to pay the CPF for the first $6,000.
- The Additional Wage Ceiling refers to a CPF contribution cap that is set so that employees do not have to pay extra contributions from any extra wages or bonuses that they earn. The additional wage ceiling is capped at $102,000 for the entire year. This means that bonuses are also subject to contribution, but only annual amounts below the above-mentioned amount are subject to the CPF deduction.
The different types of CPF accounts
It is important to note that there are different types of CPF accounts and each of them has a specific use. This means that employers may use the saved amount for various purposes depending on the selected type of CPF account. Below are the different types and their uses.
- Ordinary account- This is a CPF account that allows the employee to use the saved amount for purposes such as investing, paying for higher education and housing. The account holder can use any remaining amount as a fall back once they retire.
- Special account-This account specifically focuses on saving money for retirement although the money can also be invested to some extent.
- Medisave account- Just as the name suggests, this is an account that is designed to cater to any expenses arising from medical reasons such as hospitalization. The money from such an account can also be used to pay for Medishield which is a basic health insurance plan in Singapore.
- Retirement account- this is a CPF contribution that is set up primarily with the goal of saving for retirement. In short, this is an account that one sets up for their retirement savings. This type of account is only available when one turns 55-years-old. Upon this stage, their ordinary account and special accounts are combined to form a retirement account.
Now that we have already understood the different types of CPF accounts that are available, we can dive into how these accounts receive their share of the CPF contribution. Individuals that earn more than $750 and above in monthly wages have their CPF contributions between different accounts in a process known as CPF allocation. Below is a chart that demonstrates how the allocation is done.
The CPF allocation is designed such that more money is allocated to an individual’s ordinary account when they are young than the amount allocated to their Medisave account. This is because the young are energetic and have statistically fewer health problems than those in the old age bracket. The youth also focus more on securing funds for things like housing.
However, things start to change as one gets older and more money is allocated to the special account in preparation for retirement and also into the employee’s Medisave account in preparation for healthcare needs. The contributions for the Ordinary account and the Special account decline drastically when an individual reaches 55-years-old. The contributions for the Medisave account remain high because people are likely to have more medical needs at old age.
Although the CPF contributions are mandatory for the employed, it is best to view them as an opportunity to manage one’s income more efficiently. Additionally, Singapore residents get to use the money saved in their CPF accounts for various purposes such as buying a home, investing and catering to their medical expenses. The system is therefore designed to make life easier for Singapore citizens.