CPF Special Account: What Is It And Why Is It A Good Consideration Before Retirement?
Retirement is something that everyone has to think about at some point and something that everyone including the rich should plan for. There are many solutions out there but one of the most common ones is pension funds. In Singapore, there is such a program which is known as the Central Provident Fund (CPF).
What the CPF special account?
CPF is Singapore’s plan that aims to make sure that the elderly people in the country are taken care of once they retire. It is presented as an investment vehicle that is mandatory for all the citizens of Singapore that are employed and is, therefore, a social security program. In order to understand the CPF special accounts, it is important to understand the variety of CPF savings options that include:
- Retirement accounts-Is usually opened when an individual reaches 55-years-old.
- Medisave account-is created to cater to medical expenses.
- Ordinary account –this CPF account targets the education, insurance, housing and investment sectors
- Special account-this type of CPF account focuses on investments designed to sustain people when they attain old age.
This is what those registered to CPF special accounts should expect
The CPF special account focuses on matters related to retirement, specifically making sure that the financial needs of retired citizens in Singapore are met. It mainly achieves this by making sure that the retirement savings of employees in the country are invested in financial products. The idea behind this investment/retirement scheme is to have a stable source of revenue after retirement.
A CPF special account also guarantees a significant interest as high as 5 percent per annum which is usually more than the interest rates of other accounts. A review of the interest rates takes place on a quarterly basis. The funds set aside for savings in the program are also invested in financial instruments that are related to retirement as part of making sure that the financial future of the people is safeguarded.
Beneficiaries of the CPF special account program are also safeguarded by the fact that their funds are invested in securities that are backed by the Singapore government.
How much interest does the CPF special account earn?
As pointed out earlier, the rate of interest is evaluated on a quarterly basis. The CPC special account can earn at a floor rate currently set at 4 percent per annum or at the average 12-month yield period for government securities plus 1 percent. The yield period is usually 10 years. The government of Singapore decided to set a higher floor rate at 4 percent per annum by the end of this year owing to the slow interest rate environment.
The current rate is believed to be a good level especially since it is a risk-free investment. Also, the first $60,000 that a CPS special account holder manages to save in their account will earn them a 1 percent interest. However, they might have to top up their accounts in order to achieve this especially for those who are in their early stages.
When are the funds accessible?
Holders of CPF special accounts can only use the funds in their accounts once they retire. Additionally, they can spend the funds in their special account in housing insurance, and education among other things. This means this specific account is versatile, unlike other accounts which only allow specific uses. This is one of the reasons why the CPF special account is unique and appealing.
Can funds be transferred from an ordinary account to the special account?
Yes, it is possible and the Singapore government has worked towards making it as easy as possible. Anyone can achieve this by visiting the CPF website where they can log in using their SingPass ID as well as password. It is worth noting that transfers are not reversible once they are carried out and this lack of reversibility is also the biggest disadvantage of transferring funds to the special account. If an account holder transfers a large sum, they will not be able to access the funds in case of an emergency since the amount is locked in the account.
Topping up a CPF account
Employees in Singapore are mandated to send about 17 percent of their salary to their CPF accounts. However, there is no ceiling on the amount that can be saved in the CPF account. Here are five reasons why topping up is a good idea.
- To achieve better interest returns
As noted earlier, funds saved in a CPF special account will earn an interest of about 4 percent per annum. Additionally, the first $60,000 earns an extra 1 percent interest which means that account holders with more than $60,000 in their CPF special accounts will earn about 5 percent interest annually. Account holders can top up so that they can reach the $60,000-mark faster and in turn benefit from higher interest returns.
- It is one of the few risk-free investment options out there
Topping up a CPF special account is also a good idea because one is guaranteed that their investment is secure. This means that the savings will not be affected even the economy is not performing so well. It is thus one of the safest ways to secure your earnings and future. One is thus better off topping up their CPF special account than risking their money elsewhere.
- Ideal retirement backup
A CPF special account could be the ideal go-to for those who do not have a retirement plan. Account holders can come up with a target amount and calculate how much they would need to deposit in their accounts every month. Account holders can easily achieve their targets if they remain committed.
- Tax benefits
Topping up a CPF savings account is also ideal because they can enjoy tax reliefs of up to $7,000 on top-ups. Topping up should also allow an account holder to reduce their taxable income by as much as 14,000 meaning they can lower their tax bracket. It is, therefore, miles better than putting money in a savings account.