Should You Voluntarily Put Money Into Your CPF?

Singaporeans and permanent residents who have a CPF account have the option to top up their account voluntarily.

This move is done for two reasons.

Firstly, topping up your CPF helps to increase your nest egg for the future by setting aside more money, which you can access when you retire.

The second reason is to reduce your taxable income.

Some Singaporeans may not be familiar with the pros and cons of this voluntary CPF contribution.

In light of this, I have decided to discuss the arguments for and against voluntary topping up of your CPF account. This will be split into two articles.

In this first article, I will describe the arguments for topping up, and in the second, I will look at reasons why topping up may not be such a good idea.

Tax relief

When you top up your CPF voluntarily, you will be entitled to tax relief.

For each dollar that you top up, you will reduce your taxable income by the same amount.

However, the maximum tax relief you can claim is S$7,000 for your own CPF account and another S$7,000 to a family member’s CPF account, for a total of S$14,000.

Do note also that your spouse or siblings must not have earned more than S$4,000 in the year preceding the year of top up.

There is also a limit on the top up amount for the computation of tax relief that is contingent on the retirement sum in your CPF account.

For those below 55 years of age, the limit is the difference between the current full retirement sum (FRS) and the amount parked in your special account, minus the net special account savings withdrawn under the CPF Investment Scheme.

And if you are 55 and above, the limit is set based on the FRS minus your retirement account savings balance.

The FRS for the year of assessment 2021 and 2022 stand at S$181,000 and S$186,000, respectively.

Let’s use an example to illustrate this. Assume you have annual income of S$300,000.

If you decide to top up S$7,000 into your CPF account and another S$7,000 to a family member’s account, your taxable income will be reduced to S$286,000.

This deduction can result in a significant amount of tax savings, especially if your income bracket is in the higher range.

For instance, the highest tax bracket is 22% of your income, which is sizable.

To put this into perspective, legendary investor Warren Buffett “only” managed to achieve a 19.8% return per year.

If you are able to lower your tax bracket, you get to save a few percentage points in tax, which may accumulate to a sizable amount of money over time.

Furthermore, CPF accounts accrue interest over time.

This means that the money you save by not paying tax is growing each year, multiplying the effects of your tax savings.

CPF interest is more than bank interest

Despite CPF interest being fairly low, it is still quite a bit more than the interest rates banks are paying.

Ordinary CPF accounts can return up to 3.5% a year while special accounts can enjoy up to 5% a year, both on the first S$20,000 of funds.

At current bank interest rate levels of between 1-2%, this can mean a few percentage points difference.

These accounts enable you to enjoy a near risk-free return as the Singapore Government is one of the few in the world that has a triple-A credit rating from international credit rating agencies.

Wage earners who are not sure how to invest their money or are risk averse may consider topping up their CPF as a good investment option.

Having said that, more savvy investors who are familiar with the stock market and other investment options may not view the CPF interest rates as sufficient and may look for higher-yielding options.

Creates a disciplined money saving habit

If you are worried that you might spend your money recklessly and not have enough for retirement, then voluntary CPF contribution might be your answer.

By putting more money into your CPF account, you lock up your savings until your retirement when you will finally be able to access it.

It’s a good idea to set up a system where a specific sum of money is automatically transferred to your CPF account.

The CPF Board has a form that allows you to use GIRO to transfer a fixed sum to your CPF account on either a monthly or annual basis.

Setting this system up is akin to a regular savings plan where you make periodic additions to grow your pot of CPF money.

Get Smart: One option to grow your money

Wage earners who are wondering if they should top up your CPF account voluntarily will need to consider all facets of the decision.

CPF accounts pay higher rates than bank accounts and allow you to set up a disciplined savings habit.

But, there are also disadvantages relating to such top ups.

In the next article, I will dig into some arguments against voluntary CPF contributions.

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