I attended a talk about CPF by Christopher Tan from Providend. It was entertaining and educational, which is not easy when the topic is CPF. In fact, this is the second time I listened to him speak on this topic. I would encourage my friends to attend his talk if he still gives any in future.
He explained the mechanism of CPF Life in detail so that we could have an appreciation of how it works and how we could use it to secure a basic retirement. It could get very technical and he told us that he would not be surprised that we would forget 80% of it after the talk ended. But he still does this again and again because he wants us to know that the CPF Life has been a thorough thought process and that the system is robust. I decided that I should record whatever I could remember here for myself and my friends who might be interested.
Disclaimer: below content credit to Christopher Tan, but any mistakes, if any, are mine. Do consult CPF if you have any queries on CPF Life.
Firstly, something trivial, or maybe not: the Life in CPF Life is actually an acronym. LIFE stands for Lifelong Income For the Elderly. This is the essence of CPF Life: to ensure the elderly could access to a lifelong income for the rest of their lives. It also functions like an annuity plan.
There are two plans for us to choose from by age 65:
The main difference is how the money is split between the Retirement Account (RA) and the Annuity Premium (AP) when we chose the plans. The RA is created when we reach age 55, and our Ordinary Account (OA) and Special Account (SA) balances are pooled to form RA. The AP would be placed in a Lifelong Income Fund, which pools all the AP from all CPF members.
For Basic plan, 10% of the RA funds would be placed in Lifelong Income Fund as AP, 90% of the funds remains in RA. For Standard plan, 100% of the RA funds would be placed in the Lifelong Income Fund.
For the monthly payouts, Basic plan pays out less than the Standard plan, but would leave a higher bequest than the Standard plan.
Source: CPF Board
If a CPF member opts for the Basic plan and he
a. dies before age 65, all the RA funds and interest earned go to the beneficiaries. There is no contribution to AP yet if member dies before age 65;
b. dies after age 65 but before 90, any balances in RA & interest earned, and AP would go to the beneficiaries. However, interest earned on the AP would remain in the Lifelong Income Fund;
c. dies after age 90, any balances in AP shall be returned to the beneficiaries, but not the interest earned on AP, as that would remain in the Lifelong Income Fund for risk pooling. How about RA? you might ask. Well, the RA balances would have been depleted by age 90. Hence, the CPF Life really acts to support members should they live beyond 90.
The above is also the main reason why Basic would leave a bigger bequest. Most of the funds are still in the RA and still earning interest that would not be pooled to the Lifelong Income Fund.
Question is, should members choose Basic or Standard?
Maybe the numbers below might give you some idea:
|Monthly Payment based on Full Retirement Sum of $166k||$1,289 – $1,420||$1,174 – $1,296|
|@age 65||$239,344 – $249,632||$249,306 – $261,244|
|@age 75||$79,172 – $84,572||$189,742 – $202,428|
|@age 85||$0||$103,670 – $113,251|
These figures could be requested from CPF. One of my elderly at home has requested for a comparison of the figures before making the decision between the Basic and Standard Plans. When you present tangible figures to people, they would be able to see the differences immediately and make an informed decision.
The difference in the bequest is really huge should the member live to an old age. Hence, if members could afford to live without the $100+ difference in monthly payout, then Basic plan seems to make a better choice.
However, if the $100+ difference is going to make a huge difference, then member should choose the Standard plan.
By the way, the Standard plan is the default choice. Why? According to Christopher, CPF Life is designed to help the low income group that earns about $1500 per household. For them, every dollar would count when they grow old. They also tend not to be highly educated and might not even go to CPF to make the choice between the Basic and Standard plans. Hence the Standard plan, which pays out a higher monthly payment, was made the default.
After I have typed the above, I find that it is really difficult to explain the whole mechanism in a simple manner. I have tried my best and hope you will find this useful.
Christopher has also touched on a couple of related topics, which I would record in another post.
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