Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Wednesday, 2 September 2015

How to Escape the Retirement Sum?

Today's post is on how to avoid the Retirement/Minimum sum in your CPF when you reach age 55.

3 Types of CPF Retirement Sums
Disadvantages of Private Annuity Fund
CPF Life VS Annuity Fund
What is an Annuity Plan/Fund?
What is CPF LIFE?

There are currently 2 ways to avoid having to set aside a minimum sum.
Today, we will be sharing about one of it: Buy a Life Annuity Plan

Buy a Life Annuity Plan.
A life annuity plan is an insurance plan that is set to pay you a fixed amount of money each month/year in the future (usually when you retire) for as long as you live.

Buying an Annuity Plan
1) Buy an annuity insurance plan using your own cash (out of your pocket)
2) Buy an annuity insurance plan via the CPF Investment Scheme - using your CPF money.

Avoiding Retirement Sum
1) You must be 55 years old when you are trying to apply for this exemption.
2) When you cancel your annuity plan after withdrawing out your CPF Retirement Sum, CPF has the right to claim your annuity plan's cash surrender value and top it up to your CPF Retirement Account.

3) You can avoid the Full Retirement Sum (FRS) or you can partial avoid the FRS.

Avoid Full Retirement Sum
If your annuity's monthly payout meets or exceeds the monthly payout given by CPF, you can apply for an exemption from FRS. CPF upon approving the request will return you your FRS.

Partial Avoid Full Retirement Sum
If your annuity's monthly payout is below the monthly payout given by CPF, you can apply for a partial exemption from FRS. CPF will base on your annuity's monthly payout and determine the amount that will be "refunded" to you from your FRS.

Disadvantages of Annuity Plans
1) Most annuity plan pays you a fixed amount for as long as you live.
If you live long enough, chances are you are bound to benefit from this scheme.
However, if you unfortunate do not live too long, say you live till only 80 instead of the projected 90, the "cash value" left in your annuity plan is usually not returned to your dependents.

This is different from the CPF LIFE Scheme, which is an annuity insurance plan, but has a feature that if the amount you paid (your minimum sum) is not used up by your monthly payouts when you pass away, the remainder will be passed to your dependents.

2) You are unable to know the monthly payout you will get in the future - the numbers are only disclosed in the year you reached age 55. This creates uncertainty in what size an annuity plan you should take up, which might lead you to over or under-size your annuity plan.

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