CPF Shielding Hack: why all the Hoo-ha?
SingSaver wrote this post about CPF Shielding Hack which is information that is not exactly “brand new”, but I believe is something that is not discussed very often.
Christopher from Growing your Tree of Prosperity wrote an article with a “fiercely” worded title: CPF Shielding Lifehack is an abomination that must be ended by the CPF Board, which likely caught the attention of many CPF enthusiasts or non-enthusiasts alike.
Now, the word abomination is something that I would tend to describe killers, rapists, etc, and probably not a CPF “loophole” that has been in place for years. But no disrespect to Chris, he is free to use whatever description he deems fit to describe his love or hate pertaining to CPF. Haha.
So, what exactly is CPF Shielding Hack and why should there be such a big hoo-ha over this?
I would not be talking about CPF shielding hack in great detail as there have already been numerous articles written about it in the past, with Lorna Tan, the best-selling author of the two personal finance books: Retire Smart and Money Smart “championing” the idea, with a feature written in a Straits Times article.
Instead, I would like to highlight a more “pressing” issue that is taken for granted.
But first, a little more on CPF Shielding Hack.
What is CPF Shielding Hack?
This is a “trick” or “hack” that is relevant to someone who is hitting 55, where one’s CPF Retirement Account (RA) would be formed which is under the CPF investment scheme.
When you turn 55 years old, your CPF RA will be created, funded with monies in your CPF Special Account (SA) and CPF Ordinary Account (OA), up to the Full Retirement Sum (FRS) which is currently at S$186,000, which can also be considered as basic retirement sum in Singapore.
So, in 2023 if you are age 55 years old, you will need to set aside S$186,000 from both your OA and SA accounts, to be transferred to your RA account for payment of your CPF LIFE when you hit age 65. Any amount over S$186,000 can be withdrawn from your cpf accounts if you so wish to do so.
Most people are clear about this. So, what is this CPF Shielding Hack all about?
This method came about because there is a particular “sequence” to fund your RA and this sequence cannot change. Monies from your SA account will FIRST be transferred, followed by your OA. Assuming that you are age 55 today, and you have got S$200,000 in your SA account and S$200,000 in your OA account. Immediately, S$186,000 will be withdrawn from your SA account to fund your FRS.
Since you already hit the S$186,000 FRS criterion, that means the money in your OA would not be utilized to fund your RA account and you are free to withdraw them as you deem fit.
Many Singaporeans will be more than happy to finally “see the daylight” from their CPF funds at this juncture.
The more CPF savvy folks would, however, engage in this CPF Shielding Hack. You see, monies in your CPF SA is generating 4% while monies in your CPF OA are generating just 2.5%. What if I can transfer the bulk of my OA into my RA first, without having to touch most of my SA monies? This would mean that instead of generating 2.5%, I will now be able to generate a higher rate of 4% on my original OA funds? This interest is almost “guaranteed” if I may add.
I highlighted that the sequence of funding your RA cannot be changed: SA amount deployed first before using OA. Your SA was set up in the very first place with retirement in mind, hence it is only natural that funds from this account would be channeled FIRST towards your retirement efforts, followed by your OA account.
So how does one “reverse” the funding sequence?
This “hack” thus involved “draining” your SA account temporarily to prevent the bulk of your SA funds to flow into your RA account. Your OA account will thus be used to fund the majority of your RA requirements, up to S$186,000 which is the current FRS amount.
Once that is done, you can then “return” the funds in your SA. By incorporating such a “hack”, you can then generate higher interest from your OA account (2.5% interest) (since the RA account also generates a return of 4%), while still keeping the majority of your funds in SA in-tact, to continue to generate 4%.
How is this hack achieved?
This CPF Shielding Hack can be achieved by purchasing investment products under the CPF Investment Account or CPFIA in short, using monies from your SA account to temporarily “drain” it.
So if you are hitting 55, you can select to temporarily “park” your funds in these investment products to execute this hack.
Note that one is not able to deploy ALL the monies in your SA account for CPFIA purchases and has to keep a minimum of $40,000. This would also mean that at least S$40,000 would first flow into your RA account. However, monies over S$40,000 can now be used to purchase short-term investment products, so that they will NOT be channeled towards your RA.
Instead, monies from your OA will be used to fund the remaining amount of (S$186,000 – $40,000 = S$146,000) that is required in your RA to meet the FRS criterion based on the 2021 minimum sum amount.
That also means S$146,000 of your money will now be generating a higher interest rate of 4% in your RA vs. 2.5% if it remains in your OA.
That in a nutshell is the gist of this CPF Shielding Hack.
CPF retirement planning service (CRPS)
Christopher believes that this CPF Shielding Hack “loop-hole” should be closed or at least such a “hack” is transparently communicated to the public.
I am not sure if the government has the “incentive” to do so. Why should the government “willingly” pay an additional 1.5% on your CPF investment scheme? That means Temasek and GIC’s funds would have to work much harder in today’s low-interest-rate environment.
Something that might not be known, for those who are reaching 55 years of age, you might receive a letter to attend the CPF retirement planning service session, or CRPS for short, which is an avenue for those hitting 55 to better understand what might happen to their OA and SA funds.
It is an opportunity for you to ask questions on CPF savings and retirement-related issues to better plan for your retirement.
While the CPF personnel is unlikely to “actively” inform you of such a loophole during the CRPS session, there is no harm in taking this opportunity to clarify with them.
For those who did not receive the invitation, you can book an appointment through this link.
Increasing your retirement knowledge
I am not sure what the big hoo-ha is over the CPF Sa Shielding Hack. At the end of the day, the world is not created equal for all humans and it is up to the individual to get the necessary financial knowledge to come out ahead of the rest.
Personally, the “loophole” around CPF Sa Shielding Hack is no big deal. Instead of focusing too much on maximizing one’s CPF accounts through that additional 1.5%, one should instead focus on the issue of insufficient CPF to support retirement in the very first place.
According to this article, it was highlighted that there are 400k who do not even have $93k in their CPF account to meet the Basic Retirement Amount figure (based on 2021).
That is approx. half of the population in this age group who don’t have S$93k in their CPF accounts and that to me is startling news. Whether or not these folks are “asset rich but cash poor” that I do not know with certainty.
For these people, CPF Shielding Hack is not a major concern, to be honest. What is of real concern is the ability to support one’s retirement when the time comes.
Can we ever see the daylight out of our CPF funds?
For those who think that I am a hardcore PAP and CPF supporter, don’t get me wrong, I am just adopting an unbiased and neutral stance.
Based on how the FRS is appreciating, the FRS figure will likely hit > S$400k by 2050 (currently at S$186k).
Additional Reading: Full Retirement Sum > $400k by 2050
Imagine telling a 26-years old today that in 29 years when he hits 55-years of age, he will need S$400k in his CPF to be eligible for any excess withdrawal and you might probably witness a look of despair.
You see, the FRS amount has been increasing by an average of 3.8% annually from 2010 to 2021.
Assuming a 2.8% rate of appreciation (which is the average rate over the past 2 years), the final figure at the end of 29 years in 2050 is S$414k.
Is it realistic for Singaporeans when they turn 55 to have $414k (in 2050) in their CPF? I would think it is a tall order.
The main question to me is: Why is the FRS figure increasing by such a “high rate”?
The common explanation is to keep pace with inflation.
But we can see that the inflation rate in Singapore has been trending at a much slower pace as compared to the average 3.8% increase in the FRS figure. In the high inflationary years of 2011 and 2012, the FRS appreciation rate was even higher at >6%.
I would think that if inflationary fears are to be realized in the not-so-distant future, the government would use that excuse to “jack” up the FRS appreciation rate above the current 2.8% level.
Is this increase in the FRS fund “in-lieu” of the higher cost of living as a result of inflationary pressure justifiable?
Assuming that the FRS fund is to keep pace with the inflationary amount from 2010, the figure would increase from S$123,000 in 2010 to just c.$140k in 2021, a good $46k lower (money in our pocket?)
Can the government continue to justify the high rate of FRS fund increment solely based on the inflationary theory?
Will the government keep the current 2.8% FRS increment rate steady even if we are to experience years of high inflation rates similar to the 2011-12 period?
Only time will tell but I have a niggling suspicion that it is not going to be the case.
So, instead of focusing on why all Singaporeans are not entitled to that additional 1.5% due to the “hack”, the BIGGER question is: do we need that much in our FRS come 2050, and is that figure justifiable by inflation?
I have written several retirement-related articles and I am well aware of the fact that to retire WELL, this retirement figure of S$400k+, while it seems substantial on the surface, is not anywhere near sufficient.
Additional Reading: How much to retire in Singapore
Additional Reading: Do we need S$4.3m to hit financial freedom in Singapore and retire early?
However, the definition of retiring well is highly subjective and differs drastically from person to person.
Conclusion
This article is just my personal opinion and there is no intention to offend anyone, be they hardcore lovers or haters of the CPF investment scheme.
I hope to present a neutral stance in my argument.
I believe the CPF Shielding Hack is good to know information. Anybody who knows this “hack” can execute it and there is absolutely no discrimination against individuals who knows about it but cannot implement it (assuming he/she has sufficient funds in the CPF account)
The question is whether you are “hardworking” enough to read up on these retirement titbits to benefit from such information.
There is no incentive on the part of the government to aggressively promote this “loophole” as it will just entail a higher financial liability on their part.
They can however select to increase your FRS growth rate down the road, which to me is a “bigger problem” vs. closing this hack. Whether such an aggressive FRS growth rate is to safeguard Singaporeans financial future, this is something that you can decide.
Let me end this article by saying that fortune favors those who are prepared. Don’t penalize others for your unwillingness to increase your financial knowledge to better prepare for your retirement.
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1 thought on “CPF Shielding Hack: What is the big deal about it?”
Hi Royston, would you be able to share your idea which CPFIA funds to consider assuming one would like to consider the CPF shielding hack or one who is interested in investing their CPF funds? Thanks. Regards, Edmund