Data published by the Department of Statistics has estimated that in 2013 life expectancy at birth is 80.2 years for males and 84.6 years for females and an average of 82.5 for Singaporeans in general. Given the fact that this is one of the highest life expectancies in the world, Retirement planning has assumed increasingly important dimensions to ensure that retirees spend their last years reasonably sure of having their basic needs + more being met.
Here we will look at a few important avenues through which you can build a sufficient corpus to fund your post-retirement life and goals:
Central Provident Fund – The Central Provident Fund (CPF) is a comprehensive social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. Both employees and employers make monthly CPF contributions. These contributions go into three accounts:
■ Ordinary Account (OA) – for housing, insurance, investment and education.
■ Special Account (SA) – for old age and investment in retirement-related financial products.
■ Medisave Account (MA) – for hospitalisation expenses and approved medical insurance.
The interest rate is currently 2.5% for OA, and 4% for SA and MA. A fourth account, the Retirement Account (RA), is automatically created on your 55th birthday. Savings in the RA currently earn 4% interest per annum. In addition to the standard interest earned in your accounts, the first $60,000 of your combined balances, with up to $20,000 from the OA, will enjoy an extra 1% interest per annum. This works out to be 3.5% per annum earned on the first $20,000 in your OA, and 5% per annum earned on the first $40,000 (up to $60,000 if no OA savings) in your SA, MA and RA. The extra interest earned will help enhance your retirement savings.
CPF Life – The CPF Lifelong Income For the Elderly (LIFE) Scheme is an annuity scheme that provides you with a monthly payout from 65 years for life. On your 55th birthday, your Retirement Account (RA) is created to set aside your CPF Minimum Sum from your Special Account (SA) and Ordinary Account (OA).
Using your RA savings, you will be placed on CPF Life if you fulfil the following criteria:
■ Are a Singapore Citizen or Permanent Resident.
■ Turn 55 years old on or after 1 January 2013.
■ Have at least $40,000 in your RA when you reach 55 years old or $60,000 in your RA when you reach 65 years old.
If you are not on CPF LIFE, you will get fixed monthly payouts from your RA savings for about 20 years or less. You can apply to join CPF LIFE to enjoy lifelong payouts, any time before your 80th birthday.
You can choose between two plans, LIFE Standard Plan and LIFE Basic Plan, each with a different combination of trade-offs between the monthly payout you receive and the bequest you leave for your beneficiaries. You can use the CPF Payout Estimator to estimate each plan’s monthly payout and bequest. You can then choose a plan which suits your retirement needs better.
Supplementary Retirement Scheme (SRS) – Your CPF savings may not always be sufficient to meet your retirement needs. The SRS provides you with another way to enhance your retirement corpus. You can open an SRS account at the participating branches of any of the three SRS operators: DBS Group Holdings Ltd, Overseas-Chinese Banking Corporation (OCBC) Ltd and United Overseas Bank (UOB) Ltd. You and your employer may contribute any amount to your SRS account up to the maximum SRS contribution.
You can invest the invested monies in a wide range of financial instruments, including those offered by product providers other than your SRS operator. Acceptable financial instruments include unit trusts, insurance products and other financial products. All sale proceeds must be returned to the SRS account. Both contributions to SRS and investment returns enjoy tax benefits.
Upon reaching the retirement age of 62, you may make withdrawals at any time, and for any amount. 50% of the withdrawals will be subject to income tax. If however you make a withdrawal before the retirement age of 62, 100% of the sum withdrawn will be subject to income tax. You will also face a 5% penalty for premature withdrawal.
Endowments and Annuities – In addition to the above avenue for retirement savings, there are a number of private providers including banks and insurance companies that offer endowment and annuity products geared towards retirement.
Endowments are investment-linked insurance policies. A portion of the premiums paid is used for providing life coverage while the rest is used for investments, usually, units in various funds. Endowment policies usually mature after a fixed period of time, e.g. 10, 15 or 20 years.
An annuity is an insurance product that provides regular monthly payments and can be bought by paying a lump sum. Annuities are either immediate or deferred. Immediate annuities typically pay regular income one month after the Lump Sum Premium has been paid by the policyholder. Deferred annuities pay the regular income a few years after the lump sum premium has been paid.
Financial Planning – Planning for your retirement is best accomplished by starting early, maximizing your savings and choosing wise investment avenues to grow your retirement corpus. Half the battle is won if you arm yourself with the right knowledge and the MoneySENSE (a national financial education programme for Singapore) website (www.moneysense.gov.sg) is a great place to start with.
Another great way to plan your retirement is to take the assistance of Financial Advisers; just ensure that the Adviser you are dealing with meets the criteria laid down by the Monetary Authority of Singapore and the rules under the Financial Advisers Act.