Comparing Pension Schemes

I did some googling in order to understand about the types of pension schemes around the world. It’s pretty complex. There are so many versions out there. I can’t put it all down here. So I’ll try my best to summarize it as much as possible.

They have employment based pensions, social and state pensions and disability pensions. Retirement plans can be classified as defined benefits or defined contribution plans. A defined benefit is a plan where workers will accrue their pension and upon retirement, the firm pays them a benefit.

Defined benefit plans may be funded or unfunded. In an unfunded pension, no assets are set aside by the employer. The arrangements are provided by the state and the benefits are paid directly from the worker’s contribution and taxes. This method of financing is known as pay as you go.

A funded plan on the other hand, contributions from the employer and from the workers are invested towards meeting the benefits. All plans must be funded in some way. And then after reading the rest of it online, I got lost in the mumbo jumbo stuff. I know it doesn’t apply to our CPF system.

Then my eyes fell on the part that says defined contribution plans. It’s a pension plan where employer set aside a certain proportion of a worker’s earnings in an investment account and the worker receives this savings and any accumulated investment earnings upon retirement. The contributions are paid into the worker’s account. The contributions are invested . On retirement the members account is used to provide retirement benefits and sometimes through the purpose of an annuity which then provides a regular income. I guess this may sound pretty close to our CPF system but the investment part may not be applicable.

In our CPF system, both the workers and employers will contribute a certain amount based on age and wages and this money will be distributed into 3 accounts namely the ordinary account, special account and medisave account.

The ordinary account may be used for housing loans, education loans and investments such as stocks and  unit trusts apart from retirement. This account only earns 2.5% of interest but this is still better than a bank account. Those who have enough to invest in a property might be able to maximize this value if they know how to.

The special account is purely for retirement purposes and will later be used to fund the retirement account which will then be used to pay for the CPF Life, an annuity. Although it’s possible to invest this amount, it is not encouraged as this account earns 4% of interest. IF you can find an investment that can give you a guarantee returns that is higher than 4%, then you probably have a very good eye for making investment decisions. Otherwise, just leave the money here.

The medisave account cannot be withdrawn at all. It is meant for funding certain medical bills and there are certain limits per year as well as based on the type of treatment. It can also be used to pay for the premium of certain health insurance. The most basic health insurance that anyone can have is the Medishield plan.

There are so many things to digest. This system is trying to take care of so many needs of workers. But what about those who are self employed? I understand that all self employed people have to make a compulsory contribution to their medisave account. The rest of the accounts will be voluntary. I guess that’s it for today. I shall write more as I go along. I’m not an expert in this area but I am learning as I go along.  

Some notes on RSTU CPF

I have wonderful news! Well, at least to me. I've just done a top up of my special account. Hooray! This is the first time that I am topping up at so early in the year. I usually wait till it's the end of the year. I've read that topping up at the beginning of the year allows you to earn more interest for your account and since I am way behind in achieving the Full Retirement Sum (FRS), people like me should try to top up as earlier in the year as possible. There are folks who even did it exactly on the 1st January 2022. 

The top up was so fast and the amount was immediately shown in the app. I used the CPF app to do this top up with paynow. Once the transaction was done, the balance was done immediately!

Although I do feel a pinch in my savings account for doing this, I'm doing this for the better future old age. According to the app, there is a term that says "Part of this account has been reserved." I googled to find out what is that. It simply means that whatever you top up, cannot be withdrawn after 55. This money will be used as part of your CPF Life. Now I understand why there are advocates who are earnestly topping up their SAs before retirement. If you can hit the FRS at a faster rate, the balance will be available for your withdrawal after 55, assuming that you do not want to go for the ERS. But my advice is if you are still going to continue working after 55, leave your money in there to continue earning the 4% of interest. There is no bank deposit out there that can offer you a higher interest rate. So if you top up towards your CPF Life account and hit the FRS, you can treat the SA as a savings account that can earn a higher interest rate. 

It is also better to target for the ERS limit after 55 if you want a better retirement income plan. Whenever I look at the mistake my parents made with their retirement funds, I am motivated to work towards achieving the ERS.  For those of you who come from a comfortable life, you may not feel what I'm going through. Because of my parents mistakes, the burden of taking care of their retirement is on me and my sibling. 

Never ever assume that you will die before you can see your CPF money. Never have this strange believe that the government will take your money or force you to work till you die. I read so many funny comments online. Anyway, I shall save that for another time. Till the next blog.

For or Against CPF Life

CPF stands for Central Provident fund. It is a national social security scheme for Singapore workers.  Every month we have to deduct a certain percent from the salary and contribute to the CPF account. When we reach the age of 55, money will be transferred into the retirement account of a certain limit and this will then be used to buy a national annuity scheme called CPF Life. An annuity by the way is a type of insurance that will pay you an income for life to the day you die. The payout usually starts from the age of 65 and the latest from 70. The  later you choose to withdraw your money, the more payout you will receive and the earlier you withdraw, the lesser the payout will be. 

There are basically three groups of people out there when it comes to the topic of CPF contributions and CPF Life in Singapore. We have the group that is against CPF, the group that  for CPF and the group that doesn't care at all. 

 

Maybe to be fair, let's examine what are the thoughts of the people who are for or against CPF. 

 

People who are against the idea of CPF. 

They feel that the government is controlling their money.  

They feel that they need cpf to address their short-term Financial plans. 

They may not live long enough to see the money. 

They believe that the government took their money away. 

They want to withdraw the money to use for urgent situations such as running out of income due to getting unemployed.  

They believe that the government is taking the money to invest it for the country and against their will. Because they believe that it is suggested by the ruling Party and they are opposed to whatever ideas suggested by them no matter what they may be.  

Because they heard it from the coffee shop or their friends said so.   

They don't need the government to help them save for their retirement and they can handle their own money.  

These are merely stuff that I heard online and I'm just posting it here. I shall list more of it here when I come across more of their reasons online. 

 

People who are for CPF 

They understand how an annuity works  and want to top up their CPF more so that they can achieve $1,000,000 by the time they reach 65. 

They like the idea of getting more tax rebates by contributing more to the CPF accounts. 

They are usually financially Savvy and they understand the meaning of compounding.  The retirement account and a special account earns an interest of 4%  so does medisave. The ordinary account however earns an interest  of 2.5% and that is so much better than what any bank can offer in any savings account.  

They want to leave a legacy behind for the next generation of the family 

They're usually very familiar with the financial industry on how things work. There are even groups that are advocates for CPF.  

 

My thoughts

When I was young I didn't see the value of CPF. What I saw was I had lesser take home pay after deducting CPF. I even had this belief that I would never be able to make it earn the then minimum sum  scheme amount for that time. At that point in time they didn't have the CPF Life scheme yet. Back then what they had was a minimum sum amount that will be increased year after year at the rate of about 3%. I think that's about the average inflation rate.  You had to keep the minimum sum amount and  only withdraw the balance after setting aside this amount at the age of 55. The minimum sum will slowly be released month by month from the age of 62 onwards.  

 

The former GM of CPF board once told us that there were three options to choose from at age 55.  

1) Withdraw everything after setting aside the minimum sum. However, putting the amount in a bank account is not a good idea because of the very low interest rate. Inflation will chew up the value of the money in the bank account.  Investing it also exposes it to a lot of risks. Unless you are very good at making positive gains with your investments. 

 

2) Don't withdraw anything if you don't need the money. Leave everything there until you need it. It will continue to earn the interest of 2.5% for ordinary account, 4% for the special account. The monthly payouts of the retirement account will start from age 62 onwards. However, this payout will stop once the balance is exhausted.   So this option is also not foolproof.  

 

3) The last option is to put all your money in an annuity plan and that is  the wisest thing to do. Says the GM of that time. An annuity will guarantee you to receive an income for life. He told us that he was going to do the annuity plan option. At that time they didn't have the CPF life scheme at all so you have to go to a private insurer to buy an annuity insurance plan. I continued to remember his words for many years to come even to this day.  When they finally came up with the CPF Life scheme, I thought of that GM a lot. He was wise man. I don't know where he is today. I don't think I even remember his name.  And we are so lucky to benefit from the national annuity plan. It's definitely cheaper than going to a private insurer.   I personally am into the idea of having an annuity  because I've seen people use up the CPF money even before they die.  There are people who even outlive their retirement accounts under the old scheme. Sad to say, my parents are one of them.  Even the idea of collecting a lump sum of cash at the age of 55 is a bad idea. Some people feel rich and put it in all the wrong places. They will regret it in their senior years when they can no longer work or get employed.  

 

I googled and learn that Singapore is not the only country with a CPF scheme. Most countries have it. In America they call it 401K and in Malaysia it's called EPF scheme. I even found a list of the best national social security schemes in the world. Singapore ranks 7 in this list and America is at 14. The top country is the Netherlands. I am curious how their plans work. I will probably check it out and blog about it another time.