What is Central Provident Fund? The Central Provident Fund (CPF) is a government-run social security scheme. Funds are contributed both by you and your employer and can be used by you for retirement, home ownership, healthcare expenses, your child's tertiary education, investments or insurance. Under statutory law, all Singapore citizens and Permanent Residents in employment have to contribute to this scheme, while self-employed Singapore citizens and Permanent Residents have to contribute to Medisave only.
From 1 July 2007, the total CPF contribution rates are 34.5% if you are below 50 years old, 28.5% if you are between 50 and 55, 20% if you are between 55 and 60, 12.5% if you are 60 to 65, and 10% for people aged over 65 years. The CPF is divided into four types of accounts: Ordinary, Special, Medisave and Retirement (for those aged over 55 years).
Ordinary account: the savings can be used to buy a home, pay for CPF insurance, investment and education.
Special account: for old age, contingency purposes and investment in retirement-related financial products.
Medisave account: the savings can be used for hospitalisation expenses and approved medical insurance.
Retirement Account: You can withdraw your CPF ordinary account savings in a lump sum when you reach 55 years old (on or after 1 July 2007), after a statutory required minimum sum of S$99,600 has been set aside. The amount you can withdraw will depend on your available balance. You can make future withdrawals six months after the initial withdrawal (if you are retired) or every three years. Fixed monthly withdrawals from the retirement account will start when you are 62 years old. Alternatively, the entire amount can be used to purchase an annuity, which also provides a fixed monthly income.
How can CPF be used? 1. Property
The CPF Ordinary account is approved for the purchase of residential properties (From 1 Jan 2006 the min cash down payment is 5%) and commercial properties. Residential real estate includes freehold and leasehold private property (at least 30 years lease remaining and last you up to at least 80 years old) located in Singapore.
You can use the entire funds in the Ordinary account to cover the initial down payment for HDB. For private residential property, you have to pay your initial downpayment in cash. You can use your future CPF contributions to finance installment payments for these purchases. If your monthly contribution does not meet the mortgage instalment in full, you can use funds from the Special account but capped at 6% of your November 1998 salary. However, if in 1999 you did not accept this offer, you will not be able to use the special account.
If you sell your property, the proceeds from the sale of your property must be used to first repay the principal amount withdrawn plus accrued interest to your CPF account. Any remaining balance is credited to you.
How to get the best deal? Price: Apart from location, price is of course the most important attribute of the property. Check the transaction prices for similar property transaction in the area to make sure you are not overpaying for your property. Mortgage: The next most important factor is your mortgage. Check with various banks and keep an eye out for any promotions by the financial institutions.
2. Insurance
In addition to the Medishield/Medishield Plus insurance schemes, you can use CPF savings in the Ordinary account to finance the purchase of endowment insurance policies from private insurance companies under the Private Medical Insurance Scheme (PMIS). The full ordinary account balance can be invested in single premium policies.
Withdrawal of funds from CPF is quick once approved, and you can do it via the insurance company.
How to get the best deal?
When you are buying insurance, you should look for the lowest premium with the highest return. To do this, check with a few insurance companies and ask for the range of their products, noting the calculation of premiums and the potential returns.
Tax implications
Proceeds from the maturity of the insurance policies and claims are not taxable. To qualify for tax relief for the annual premium payment, your total annual premium plus CPF contributions cannot exceed S$5,000 a year.
3. Investments
To help you get better returns on your CPF savings, the government allows you to invest your CPF savings through the CPF Investment Scheme. The amount available for you to invest is calculated based on the balance at the end of every month. Each revision includes any new contributions received in your CPF account. In order to invest the funds from your Ordinary Account, you would require a CPF Investment Account. Investing funds from your Special Account, on the other hand, would not require a Investment Account. Withdrawl of funds for purchase or credit of proceeds from the sale of these investments can be done through financial institutions offering the various financial products. For example, you can make CPF-approved unit trust investment here with finatiQ.
Investments from Ordinary Account
(i) Full Ordinary Account balance can be invested in: Fixed deposits with approved banks Singapore Government bonds Statutory Board bonds Bonds guaranteed by the Singapore Government Unit trusts Fund Management Accounts Annuities Endowment Insurance Policies Investment-Linked Insurance Products Exchange Traded Funds
(ii) Up to 35% of investible savings can be invested in: Shares Corporate bonds
(iii) Up to 10% of investible savings can be invested in: Gold
Investments from Special Account
Full Special Account balance can be invested in: Singapore Government bonds Statutory Board bonds Bonds guaranteed by the Singapore Government Unit trusts classified under the lowest three tiers of the CPFIS Risk Classification System Table
(Fund Management Accounts not allowed) Fixed Deposit Annuities Endowment Insurance Policies Selected Investment-Linked Insurance Product Selected Exchange Traded Funds
The CPF also provides guidelines and restrictions on the purchase of investments. The rules include: All investments must be made in Singapore dollars Profit/loss from OA investments can only be realised annually each October. However, profit made after 30th September 2002 cannot be withdrawn No withdrawl permitted for profit made from Special Account investments.
When realising profit/loss from these investments, the agent bank first deducts the cost of the investment from the sale proceeds and arrives at the gross realised profit/loss. If the investments were bought at different prices, the weighted average price is used.
How to get the best deal? The whole idea of investment is to maximise gains and minimise costs. With such a wide range of approved financial instruments, you should try to find the most suitable investment with the best return. A few guidelines can help you in the selection process: Find out how much excess funds you can invest Look at which financial instruments fall within this budget Consider your risk threshold What is the real rate of return offered by the different instruments? Determine how much time you are willing to spend on monitoring this portfolio Within the short listed group of financial instruments, choose the one that suits your requirements
In this way you can make an informed choice about your investments.
Tax Implications
Capital gains from investments are not taxable. However, dividends or profit distributions are. These deductions are usually done at the source and at the corporate tax rate.
Important notes:
This document is published for general information only. It does not have any regard to any specific objective, financial situation or the particular needs of any specific person who may receive this document. This is also not intended to provide any recommendation or advice on personal investing or to be relied upon as financial planning advice. It is not designed as a substitute for professional advice. You may wish to seek advice from your financial advisor before making any decision. Any opinion, view or estimate presented is subject to change without notice and is made on a general basis and is not to be relied on by you other than for general information purposes. Any reference to any specific company, investment product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the company, investment product or asset class. While all reasonable care has been taken in preparing this document, no warranty whatsoever is given and no responsibility or liability is accepted for any loss arising directly or indirectly in connection with or as a result of any person acting on any information, opinion or statement expressed in this document.
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