BT: Know your CPF (16 Oct 2006)

Know your CPF

Learning to invest CPF savings and planning for retirement are important for anyone starting out on his career, says DANIEL BUENAS

AS the future cohort of Singapore's workforce, it is very important for fresh graduates and tertiary students to understand what CPF, or the country's Central Provident Fund, is, how it works, and how we can use it to invest for the future.

Firstly, let's look at what CPF is, and why it exists.

CPF is a comprehensive social security savings plan that provides working Singaporeans with a sense of security and confidence in their old age, and encompasses areas such as retirement, healthcare, home ownership, family protection and asset enhancement.

Working Singaporeans and their employers make compulsory monthly contributions to the CPF, and these contributions go into three accounts:


- 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.

And your CPF savings earn interest - savings in the Ordinary Account earn a minimum interest rate of 2.5 per cent per annum, while savings in the Special and Medisave Accounts earn additional interest of 1.5 percentage points above the prevailing Ordinary Account interest rate.

For those who are self-employed, it is not compulsory to contribute to the Ordinary and Special Accounts, although you will need to contribute to your Medisave Account if you earn a yearly net trade income of more than $6,000.

A number of changes have been made in recent years to the CPF in order to make wage costs more competitive, to create and save jobs, and to make older workers more employable.

In 2003, key changes were made to the CPF scheme. Long-term target contribution rates were set at 30-36 per cent for those aged below 50 and 24-30 per cent for those aged 50-55, and the salary ceiling for contributions was lowered from $6,000 to $4,500. These changes were implemented progressively over three years.

There was also an immediate three percentage point cut in the employers' contribution rate to 13 per cent for workers aged 50 and below on Oct 1, 2003. For workers aged 50-55, the rate was cut by four percentage points in two stages from 13 per cent to 9 per cent.

The employer and employee contribution rates for older workers was also cut, from 33 per cent to 27 per cent in two stages.


INVESTMENT RULES

Now, the rules of the game for any form of investing also apply to investing your CPF. Namely, you need to consider, your investment time horizon, asset allocation, risks and returns, diversification and understand compound interest and dollar cost-averaging - all topics that have been covered before on this page.

To invest CPF savings, the Board has come up with the CPF Investment Scheme (CPFIS), which allows the investment of CPF savings in a wide range of products to enhance a person's retirement nest egg.

However, one should exercise prudence when investing CPF savings under this scheme, as there is no guarantee that investments will always be profitable or that investment products included under CPFIS will always earn profit.

You need to decide for yourself how to invest your savings, what are the risks that you can accept and how long do you want to stay invested.

Next week, we'll take a look at which accounts you can use for investments, how much you can invest, and in what products.


Information for this article was taken from the Central Provident Fund Board website. For more information, please log on to www.cpf.gov.sg

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