CPF or the Central Provident Fund scheme is one of the leading social security schemes offered by the Singapore government. The scheme stands out primarily for the comprehensive approach with which it covers almost all major milestones of an individual’s life. These include important junctures like house purchase, retirement and medical expenditure. Since there is not one but many goals that the CPF scheme tries to fulfill, there are more than one account towards which the CPF savings get distributed. Both employer as well as employee make regular contributions to CPF account which then get distributed into each of the three (four if account holder is older than 55 years of age) accounts.
The four main types of accounts into which CPF savings get deposited are –
The first bucket into which CPF savings go is the ordinary account. An ordinary account is meant to assimilate savings to be used towards housing, investment, insurance and education needs of the accountholder. The rate of interest paid on savings under ordinary account is 2.5% per annum. The first S$20,000 in the ordinary account earns an additional 1% per annum of interest rate.
The second account under CPF is the special account which is aimed at providing for expenses after retirement and for investment in retirement-related financial instruments. Approved investments include low and medium risk instruments like bonds and mixed asset investment funds. The most lucrative feature of special account is that the rate of interest paid is higher than the ordinary account and is up to 5% per annum.
Medisave is the third account into which CPF savings get distributed. This part of the CPF savings is to cater to hospitalization expenses as well as to pay for approved medical insurance. The interest rate offered on Medisave account is same as that for special account and goes up to 5% per annum. This rate of interest is reviewed quarterly and is adjusted by the Singapore government, if required. Medisave account can be used to pay for medical expenditure of self, children, parents as well as grandparents.
The fourth and the last bucket of CPF account is Retirement Account which gets created automatically when an accountholder reaches 55 years of age. With the growing pace of improvements in the medical industry, the average lifespan of Singaporeans has gone up. This has necessitated the need for an account which will cater to meeting the regular living expenses after retirement.
Transfer of funds between various CPF accounts
Out of the four different account buckets into which the CPF savings get distributed, the lowest rate of interest is offered on savings under ordinary account. This is one major reason why accountholders should look to invest more into the other three types of accounts rather than saving under ordinary account. The rate of interest for ordinary account is 2.5% per annum and an additional 1% is paid on the first S$20,000 in the ordinary account. This means that only the first S$20,000 is eligible to earn 3.5% per annum. However, since the rate of interest is compounded, the end effect which it has on the overall principal amount is colossal. Taking into account the huge impact that the compounding interest rate has on the original principal amount, it is prudent for accountholders to transfer any amount over and above S$20,000 from ordinary account to special account. However, the catch here is that savings in the special account can only be withdrawn after completion of 55 years of age.
Also, transfer of savings from ordinary account to special account can be done only if the CPF accountholder is below 55 years of age and when the total amount in CPF special account isn’t more than S$161,000, which is the full retirement amount.
Allocation of funds to various CPF accounts
Once the CPF contributions are received from the employee and employer, the funds get distributed into the three main CPF account types namely, ordinary account, special account and medisave account. The proportion of funds reserved towards medisave account increases as one grows older. This is to ensure enough funds in the medisave account to pay for increased medical expenses with increasing age, especially during retirement.
The percentage of CPF funds that is deposited in various CPF accounts is dependent upon the current allocation rates set by the government and also on the age group in which an accountholder falls. These CPF allocation rates are reviewed and updated periodically by the Singapore government.
CPF allocation of funds follows a specific order in which the contributions are first allocated to the medisave account then to the special account and whatever is left after that goes into the orodinary account.
CPF Allocation rates (January 2016 onward)
|Age of Employee||Fund Allocation|
|Ordinary Account (Contribution Ratio)||Special Account (Contribution Ratio)||Medisave Account (Contribution Ratio)|
|35 & below||0.6217||0.1621||0.2162|
|Above 35 – 45||0.5677||0.1891||0.2432|
|Above 45 – 50||0.5136||0.2162||0.2702|
|Above 50 – 55||0.4055||0.3108||0.2837|
|Above 55 – 60||0.4616||0.1346||0.4038|
|Above 60 – 65||0.2122||0.1515||0.6363|
Example of CPF allocation of any employee towards various CPF accounts
Mark is a Singaporean citizen aged 32 years. His overall CPF contribution (employee + employer) is S$200. The allocation of CPF funds in the three CPF accounts is depicted in the table below. The contribution is in-line with the rates mentioned in the allocation rate table displayed above.
|Employee’s Age (In Years)||CPF Contribution||Ordinary Account||Special Account||Medisave Account|
|35 & below||S$200||S$62.17 X200/100 = S$124.34||S$16.21 X 200/100 = S$32.42||S$21.62 X 200/100 = S$43.24|