The recent Budget 2024 introduced some changes in the CPF scheme starting in 2025, but we will focus on one in particular: Your CPF Special Account (SA) will be closed once you reach 55. What’s the impact of this change, and what can we do?
What’s the New Update?
In summary, this is the latest update from the new CPF scheme.
From 2025 onwards, when you reach 55 years old:
- The balance in your CPF Special Account (SA) will be transferred to your Retirement Account (RA) up to the Full Retirement Sum (FRS). In 2025, the FRS will be $213,000.
- After the transfer above, the excess balance in your SA will be transferred to your Ordinary Account (OA).
- Your SA account will be closed.
That is quite similar to the current scheme. What’s the big deal?
What’s the Impact?
In short, CPF shielding is no longer possible. Because your CPF SA account will be closed after your RA is formed, any form of shielding will return the balance to your OA.
What Is CPF Shielding?
Currently, there is a ‘loophole’ in the CPF scheme. This is called CPF shielding. Here is how it works:
- Right before you reach 55, you invest your CPF SA balance (ex, in short-term bond funds), so your SA balance becomes low.
- To form your RA, CPF will try to deduct from your SA, but because you do not have enough balance, it will proceed to deduct from the OA.
- After this transfer happens, you can dissolve your investment, return your money to your SA, and enjoy the liquid risk-free 4% interest rate. You can withdraw anytime and do whatever you want with this money or leave it there to collect the guaranteed 4% interest rate.
So, this sounds very good, right? It’s excellent, so that is why it’s considered a ‘loophole.’ Having access to an investment that generates long-term interest rates while having liquidity is just too good to be true. So, this loophole will be patched starting in 2025.
With the CPF SA being retired after you turn 55, this CPF shielding strategy is no longer possible because your balance will be transferred to your OA instead, thus earning ‘only’ 2.5%.
What Can We Do?
This adjustment makes sense because it closes a ‘loophole’ where a CPF member can enjoy liquidity and high interest through this CPF shielding strategy. In our opinion, this adjustment is just a matter of time, and the time is apparently next year, 2025.
So what can we do now? You have several options:
Keep the Excess Balance in OA
This is the easiest option, as this will be the default path if you don’t take any action. If you may need to access this money in the shorter term between 55 and 65 years old, this option is feasible because your balance will still be liquid while earning a decent 2.5% guaranteed interest.
The downside is that 2.5% may not beat inflation over the long term. You need to account for this tradeoff when you do your retirement planning.
Transfer the Excess Balance to RA
If you plan to use your money only for your retirement after you turn 65, you can transfer it to your RA and enjoy the 4.08% guaranteed interest. You can transfer up to 2 x FRS, which will be $426,000 in 2025.
But the catch is that you can only access it once you turn 65, and you can only receive it in the form of a CPF LIFE monthly payout. You can also do a lump sum withdrawal from RA if you pledged your property, but the amount is limited. In other words, the money you transfer to RA should be the amount you have dedicated to your retirement needs after you turn 65. It is irreversible.
Invest Yourself
If you want a more flexible option, you can always invest yourself. The catch is that you need to perform better than the 2.5% guaranteed return offered by the OA.
Well, what do you think? This may be your wake-up call to learn more about investing.
