SINGAPORE, Feb 17 — Removing the Central Provident Fund (CPF) Special Account for those aged 55 and above will "tidy up” the system and also shut down a little-used "shielding” hack that allowed some CPF members to earn a higher interest, financial experts said.

Yesterday (February 16), Deputy Prime Minister Lawrence Wong announced in his Budget 2024 speech that CPF Special Accounts will automatically close when members turn 55, as part of a move to "rationalise” Singapore's social security system. The change will take place in 2025.

This means that money from the Special Account will be transferred to the Retirement Account, up to the Full Retirement Sum, and any balance will be added into the Ordinary Account when the member reaches the threshold age.

Christopher Gee, senior research fellow and deputy director at the Institute of Policy Studies (IPS), said that since the Special Account and Retirement Account are both meant for retirement savings, there are some overlaps.

"The government's move is to tidy up the system and define the Retirement Account's purpose as (the) true retirement account,” he added.

In so doing, the experts also said that members will no longer be able to use a "shielding” hack that allows them to park more money in the higher interest-earning Special Account and Retirement Account, which each earns an annual interest of 4.08 per cent compared with the lower 2.5 per cent annual interest earned in the Ordinary Account.

Other CPF-related changes announced by Wong included the raising of the Enhanced Retirement Sum to four times of the Basic Retirement Sum, up from the current three times.

This is to allow more CPF members aged 55 and above to fully commit their accumulated CPF savings to receive higher payouts if they wish to do so.

Simplifying the CPF system

Financial experts told TODAY that the Special Account was introduced in 1977 as a way to set aside money for retirement purposes when the member is still likely to be earning an income.

Unlike the Ordinary Account, which can be used for housing purposes, members would not be able to withdraw money from the Special Account until they reach 55, or if there are other special reasons such as death, illness or permanent emigration.

Once a CPF member turns 55, the Retirement Account is created. Money in the Special Account is automatically transferred to it first, followed by Ordinary Account savings if more is needed to reach the Full Retirement Sum.

Members may also top-up their Retirement Account to reach the Enhanced Retirement Sum if they so wish.

In response to queries, CPF Board said that more than 99 per cent of the roughly 1.4 million CPF members above the age of 55 can transfer all their Special Account savings to their Retirement Account.

This meant that most members would not have any money in their Special Account after their Retirement Account is created.

However, for those who still have money in their Special Account after the age of 55, the Retirement Account and Special Account will appear to have overlapping purposes. Both also earn the same interest rate.

Timothy Ho, co-founder and managing editor of investing website Dollars and Sense, said: "In some sense, this move is long overdue.

"With the Enhanced Retirement Sum, most Singaporeans top up and have little money in their Special Account... it's an unnecessary duplicate.”

Stops 'CPF shielding'

Apart from rationalising the CPF system, the move will also effectively halt the practice of "CPF Shielding”, which experts said is generally used by wealthier CPF members.

This is because these members would have CPF savings beyond the Full or Enhanced Retirement Sum that they wish to retain in the higher interest-earning Special Account, rather than have them transferred to the lower-earning Ordinary Account as soon as they reach 55.

They would do this by performing the following steps:

• Before turning 55, CPF members invest most of their money in their Special Account through the CPF Investment Scheme into financial instruments that are ideally highly liquid and low-risk

• When they turn 55, the remaining money from the Special Account will be transferred to the newly created Retirement Account first, but the investment will not be affected

• A greater amount of money from the Ordinary Account will then be transferred to the Retirement Account to meet the Full Retirement Sum

• After that, members will divest their investment, causing the proceeds to go back to the higher interest-earning Special Account

No investments are completely risk-free, so such a hack can be hazardous, the experts said.

Gee of IPS said that by taking on investments, there is a risk that some people may "end up with potentially insufficient amounts in their Retirement Account”.

In response to a parliamentary question in 2022, Minister for Manpower Tan See Leng said about 2 per cent of CPF members in 2021 had invested their Special Account savings six months before turning the age of 55 and liquidated their investment six months after that.

Associate Professor Walter Theseira, an economist from the Singapore University of Social Sciences, said: "This whole system only benefits a very small minority of CPF account holders, who have way too much in their CPF account.

"On a system basis, (this) means that more interest is going to the group of CPF account holders with more funds, which is not really the intent because you want to help the lower income with retirement adequacy.”

With the increase to the Enhanced Retirement Sum, these CPF members who have used the "shielding” hack might choose to park more money in their Retirement Account that way, though they might see this as a "compromise”, Assoc Prof Theseira added.

Joel Koh, content manager at finance website Seedly, said that closing off this route to maximise interest earnings might discourage people from topping up their CPF accounts in the first place, adding that some members may also consider investing their CPF Ordinary Account savings outside of the CPF system to gain a higher interest.

"Although CPF can form the foundation for your retirement funds, you do not have to rely on it completely,” he added. ― TODAY