The CPF Life scheme is an attempt to repair a national pension system that has become inadequate in sustaining members through old age.
The reason why the CPF system has become deficient in the first place is because of persistently low interest rates paid on CPF accounts, which has prevented members from building their wealth, as well as members having to pay a large amount of funds towards their property.
As a result of these two factors, and to some extent the inadequacies of the Medisave system in taking care of members’ medical needs, the CPF Life scheme is needed to fill the gaps of this sinking ship.
As medical science advances and with an increased emphasis in a balanced lifestyle, Singaporeans are expected to live longer with females having an average life expectancy of 83.2 years and males an average of 78.4 years. Living longer in turn means that one needs to be financially equipped to sustain his/her living expenses.
It is with this in mind that the CPF Board came up with the CPF Life scheme consisting of 4 options for CPF members to choose from – Life Basic, Life Balanced, Life Plus and Life Income. The CPF Life Balanced is the default selection if one does not specify any plan.
Though it is compulsory for everyone who turns 55 in 2013 to opt in, this does not mean that the CPF Life is the only solution available for one’s retirement income needs.
Let us first take a look at the features of the CPF Life scheme.
Who can join CPF Life
Those age 52-54 and age 55 and above in 2009 can opt to join CPF Life (not compulsory).
Those age 51 and below will automatically be enrolled in the Life Balance Plan if they have $40,000 in their Retirement Account (RA) at age 55.
CPF members cannot commit more than the prevailing minimum sum into CPF Life.
The entire RA account up to the minimum sum will be used for the CPF Life. Once a plan has been chosen, it cannot be changed.
Attributes of CPF Life
Monthly payout is not fixed - The payout will be adjusted based on the CPF interest rates and the mortality experience. CPF, however, mentioned that the adjustments will be small.
Monthly income level - The CPF member needs to consider the income amount he/she wants to receive monthly. This has a direct impact on the bequest amount for the beneficiaries.
Bequest amount (benefit left for beneficiaries) - The higher the monthly income, the lower the bequest amount and vice versa.
Females will receive lesser amount than males
To put it simply:
How CPF Life Works
2 components to CPF Life – Retirement Account (RA) savings & Annuity
The entire RA savings will be used to fund the CPF Life scheme. This savings is split into a pot consisting of the RA and another pot which pays the annuity premium. The split between the RA and annuity premium depends on the age of entry into the plan.
For example, for a 55 year old male, the split for Life Balanced is 70% RA and 30% annuity premium.
For Life Basic, it is 90% RA and 10% annuity premium.
As for Life Plus and Life Income, 100% goes into the annuity premium (as payout starts at drawdown age).
More will go into annuity premium for the older folks who join before 2013.
Why is this split of significance?
The reason is this:
Interest earned in the RA will be accrued in the RA and the interest will be given to the beneficiary upon the passing on of the CPF member.
Interest earned on the annuity premium will be contributed towards the annuity fund which pools interest from other CPF members – this interest is not payable upon death.
What do beneficiaries get upon death of the CPF member?
For CPF Life Basic, Balanced & Plus: Unused RA savings plus the premium for the annuity less any payout.
For CPF Life Income: This plan does NOT provide for any refund even when the CPF member passes one before any payment has been made.
Note: Amounts are estimated based minimum sum $100,000 of male age 55 with deferred drawdown till age 65. CPF interest rates are assumed at levels of 3.75% and 4.25% (Non-guaranteed).
What does all this mean before you sign up for CPF Life?
CPF Life payout is fixed around the same levels
It is not pegged against inflation, hence, the value of payouts will shrink over time as prices of goods rise.
CPF Life payout is not guarantee
It is dependent on market conditions. It will be reviewed every year based on CPF interest rates and mortality experience - if CPF interest rates decrease, the payout and bequest amount will also reduce.
Limitation of CPF Life Income option
It does NOT pay out any money to the beneficiary should the CPF member die before payout starts.
Variable payouts and bequest amounts
Higher payouts mean that lesser or nothing is left for beneficiaries
Interest earned
Interest earned from the annuity of CPF Life Plus plan is distributed to a common pool
Knowing the difference between CPF Life & a Participating Annuity
The CPF Life Income option though gives the highest payout is not suitable for everyone. It must also be chosen with caution as it does not leave anything for your beneficiaries. Not only that, there is no refund option upon withdrawal from the scheme.
In conclusion:
You should not depend on CPF Life to meet all your retirement funding needs as the payouts may not substantial.
The best thing to do today is to save more and plan your retirement early.
You can also consider additional income plans like participating annuities from insurers.
It is also critical that you have adequate medical and insurance coverage in your retirement years.
CPF Life is our last line of defence against outliving our resources. Plan early for your future lifestyle needs and you can enjoy a worry free