Central Provident Fund for Expats in Singapore

Central Provident Fund for Expats in Singapore

Central Provident Fund for Expats in Singapore

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

Introduction

CPFs, or Central Provident Funds, are important for expats in Singapore to understand.

These funds make up Singapore’s social security system, which enables both working citizens and long-term residents to put money aside for their retirement.

There are many advantages because other parts of the Central Provident Fund concentrate on social programs like healthcare, home ownership, family protection, and asset development.

What is Central Provident Fund?

Singaporeans must contribute to the Central Provident Fund (CPF), a mandatory benefit account that provides healthcare and retirement income.

Both the employee and the employer make contributions to the retirement account. The three different types of CPF accounts are regular, special, and medisave.

Central Provident Fund for Expats in Singapore
CPF Board logo. Image from The Strait Times.

How does the Central Provident Fund work? 

In order to guarantee that all Singaporeans would have an income and financial security in retirement, the Central Provident Fund was established in 1955.

When the CPF was first introduced, there was a lot of opposition to the idea of a forced retirement program; however, as time went on, it gained popularity and eventually included healthcare (medisave) and public housing assistance.

Singaporeans can start taking withdrawals from their retirement accounts at age 55, and much like the US Social Security system, delaying payments until later in life results in a larger balance.

Both the employer and the employee make contributions to the CPF account. A conservative investment strategy is used to generate an annual return of about 5% on the money in the CPF account.

The CPF was expanded in 1968 to include housing under the Singapore Public Housing Scheme. The program was once more expanded in the 1980s to include medical insurance for every participant.

In order to give some CPF members the opportunity to take on greater investment risk and generate returns higher than the industry standard of 5%, a new investment option was introduced in 1986 that allowed members to manage their own accounts.

Soon after, a choice to turn the account into a fixed annuity upon retirement was added to the program.

Participants can currently choose a CPF LIFE annuity plan if they have a minimum account balance of $40,000 at age 55 or $60,000 at age 65.

If participants are fully exempt from having to set aside their retirement sum and receive a monthly pension or life annuity payout, they may choose to withdraw from CPF LIFE.

Unlike the 401(k) plan in the United States, where employees can opt out of a company’s 401(k) plan if they so choose, the CPF is a mandatory retirement system.

Unless an employee expressly requests in writing not to participate, many company 401(k) plans in the U.S. automatically enroll new employees into their retirement plan and typically deduct 3% of their pay on a pre-tax basis.

Given the many years of compounding interest lost, younger workers who choose to forego this option may experience far-reaching effects.

The wisdom of paying yourself first through an automatic payroll deduction system is at the core of both the CPF and the 401(k) retirement plan.

Considering that the employer will match these regular contributions up to a certain amount, opting out of the plan will be tantamount to the employee forgoing additional compensation to support them in retirement.

Withdrawal Age

55 years old is the age at which you can begin taking lump sum withdrawals from your CPF savings.

Payout Eligibility Age

65 years old (for those born after 1953), at which point your CPF savings begin to be paid out on a regular basis.

Various Central Provident Fund Accounts

Central Provident Fund Ordinary Account (OA)

The Ordinary Account may be used for investments, housing, and education. The Ordinary Account receives the majority of your CPF contributions (about 23% of your wages) if you are under 35 years old.

The amount you contribute to your OA decreases as you age and is prioritized over your Special and MediSave Accounts. Your OA earns interest, just like all other CPF accounts, but at a slower rate than your SA and MA.

Using Ordinary Account for Housing Expenses

The funds in your ordinary account can be used to purchase new or used HDB apartments as well as private apartments.

This includes using OA funds to help pay for the price of the home, the down payment or mortgage payments, as well as extra costs like stamp duty, legal fees, and survey fees.

There are restrictions associated with using your OA funds to pay for private housing, though. You must enroll in the Home Protection Scheme if you use your OA to pay for your housing. 

This plan guards against you and your family losing your home in the event that you pass away, get seriously ill, or become disabled. You may insure all or part of your mortgage.

Using Ordinary Account for Educational Expenses

The education of you, your spouse, or your children may also be paid for with funds from your Ordinary Account. It is also possible, though this is decided on a case-by-case basis, to use your funds to cover your sibling’s or relative’s discounted tuition costs.

To cover up to 100% of the tuition, you can withdraw up to 40% of your remaining OA balance (the balance left over after allocating money for housing or other plans) or your accumulated OA savings (the total of your current OA balance and the OA savings you’ve already taken out for education or housing).

You, your spouse, or your child must enroll in full-time, subsidized undergraduate courses at one of the following institutions to be eligible:

  • Nanyang Technological University (NTU)
  • National University of Singapore (NUS)
  • Singapore Management University (SMU)
  • Singapore Institute of Technology (SIT)
  • Singapore University of Technology and Design (SUTD)
  • Singapore University of Social Sciences (SUSS)
  • Nanyang Academy of Fine Arts (NAFA)
  • LASALLE College of the Arts (LAS)

Using Ordinary Account for Investment

As long as the investments are accepted by the CPFIS-OA (Central Provident Fund Investment Scheme), you may also use funds from your ordinary account to make investments.

Bonds, unit trusts, annuities, and exchange-traded funds are among the products in which you can invest using OA funds. You can also move your OA funds to CPF accounts with higher interest rates, like your Special Account. You should be aware that this transfer will be permanent.

You must be at least 18 years old, have more than S$20,000 in your OA, and not be an undischarged bankrupt to be eligible to invest through the CPFIS-OA.

Up to 35% of your investable funds may be placed in stocks, corporate bonds, and real estate-related bonds, and 10% of your investable funds may be placed in gold. The total of your Ordinary Account funds plus any funds used for investments or education makes up your investible funds.

Central Provident Fund Special Account (SA)

Your retirement account is primarily what the SA serves as. It can be used as a retirement savings account or for investments related to retirement.

It can be a reliable savings account because it offers an interest rate of up to 5% (as of this writing). However, this account needs to have at least S$40,000 in it if you intend to use it for investing rather than just saving.

You can only invest in approved securities that are typically low to medium risk because the SA will eventually become a part of your retirement account, such as Singapore Government bonds, Treasury bills, and annuities.

Central Provident Fund MediSave Account (MA)

Your MediSave Account contributes to the cost of your medical insurance and related expenses. You and your approved dependents may use your MediSave for specific medical procedures up to the applicable limits.

Additionally, premiums for MediShield, ElderShield, and Integrated Shield Plans that have been approved by MediSave may be paid with MediSave.

You should be aware of MediSave’s withdrawal restrictions if you decide to use it for specific medical procedures.

For example, the daily maximum for inpatient hospitalization is S$450, the maximum for outpatient chronic disease treatment is S$500, and the maximum for outpatient diagnostic or treatment scans is S$300.

Central Provident Fund Retirement Account (RA)

A new account called the Retirement Account will be opened for you when you turn 55 and will receive the money from your Ordinary and Savings Accounts.

The first 20 to 30 years of retirement, up until you turn 95, are supported by a monthly income from it.

If your RA has S$60,000 or more, you will be automatically enrolled in CPF LIFE, a national annuity program that enables you to receive a lifetime monthly income. Note that even if you fall short of the Full Retirement Sum, you do not have to top off your RA with cash.

Central Provident Fund for Expats in Singapore
Logo of CPF outside its building. Image from The Asia Law Network Blog.

CPF Retirement Sums

Your Special Account and Ordinary Account Savings will be transferred to your Retirement Account at the age of 55 to create your retirement sum.

The Basic Retirement Sum will be disclosed to you in advance to assist you in making early retirement planning decisions. Even if you do not reach your Basic Retirement Sum by age 55, you may withdraw the first $5,000 of your savings in your Ordinary and Special Accounts.

In addition to the $5,000 that members can withdraw unconditionally at age 55, members who turn 65 starting in 2023 may withdraw up to 20% of the savings in their Retirement Account that were available as of that date in a lump sum.

The payouts must be increased to reflect long-term inflation and the rising cost of living for each succeeding cohort of members turning 55. The Basic Retirement Sum that must be saved has also changed over time.

Repaying CPF Funds Taken Prior to Age 55

You must, under certain circumstances, put money back into your CPF account if you withdrew funds to pay for housing or education.

If you sell a flat that was purchased with CPF funds, one of the major repayments you will be required to make is this. Only the amount you withdrew for the apartment and the interest accrued must be repaid upon the sale of the unit.

The interest that would have been earned had you kept the money in your OA is known as accrued interest. The money can then be withdrawn once more for your subsequent home purchase.

If you borrowed funds from your CPF to cover your education costs, you also have to make a repayment.

You will be required to repay both the principal amount you borrowed and any interest that would have accrued had the money remained in the account because the amount you withdraw is regarded as a loan.

One year after the student leaves the institution, the repayment process begins. The person who received the education is the one who is accountable for paying it back.

How the US Internal Revenue Service Handles CPF Funds

The most comparable American fund is a 401(k), but CPF is not a US-qualified fund. Therefore, the contributions are not tax deductible for expats in Singapore.

There is no tax treaty between the US and Singapore, which would have effectively allowed CPF to receive US-qualifying fund treatment. Remember that the IRS counts the employer’s CPF contributions as a part of the employee’s yearly compensation.

You cannot use the Foreign Earned Income Exclusion for income from the Central Provident Fund (CPF) because CPF contributions are not regarded as qualifying income.

However, you can use a foreign tax credit as a dollar-for-dollar offset against taxes already paid to possibly eliminate the US tax on the income. When you receive a distribution from the fund, keep in mind that any income from interest is taxable.

Generally speaking, it may not be necessary to report a CPF as a foreign trust in these circumstances unless the employee has made greater contributions to the fund than the employer or is regarded as a highly compensated employee.

What expats in Singapore should avoid is having any foreign pension start treated as a foreign grantor trust, as this would result in one of the most onerous requirements for expats: Form 3520.

Your US basis in the fund is the contributions (and growth) that are taxed on American tax returns, but at the time of distribution, this basis is not taxed on a US return.

Additionally, remember that these pensions may also necessitate filing FBAR (Foreign Bank Account Reporting) and FATCA Form 8938.

The reporting of foreign pension plans under FBAR regulations is not as straightforward as it once was. Given that the rules are not as clear as they could be, you should consult a qualified tax accountant before deciding whether to report your CPF on your Foreign Bank Account Report.

However, CPF must be reported on the FBAR because it is a foreign grantor trust. Even when your CPF is an employee benefits trust, it’s usually best to err on the side of caution and report it on the FBAR.

Final Thoughts

To live well in retirement, it’s essential to comprehend your CPF. The best thing you can do to get ready to live a financially secure life after retirement is to educate yourself on the complexities of your CPF.

Even though the CPF uses your earnings, which may give the impression that they can be used for anything, remember that it was designed to help you pay for your retirement.

Many problems can be avoided in systems where mandatory savings are not required by requiring a deduction from your paycheck to fund a retirement account.

For instance, it is anticipated that the typical American will not have enough money to retire in the United States, where retirement contributions are voluntary.

As a result, when it comes to payments and contributions, you should consider splitting your income between your present self and your future self rather than temporarily giving money to the government.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 493.6 million answers views on Quora.com and a widely sold book on Amazon

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