## CPF Life: A Primer on Retirement

CPF Life was introduced by the Central Provident Fund (CPF) in 2009, replacing the CPF Retirement Sum Scheme, and is now the default retirement plan for CPF members. It differs from the previous schemes which paid the CPF member out of his/her Minimum Sum or Retirement Sum held at the CPF Board over a number of years until the money in the account ran out. CPF Life, by contrast, offers CPF members a true annuity, with payouts beginning from the age of 65 and lasting for as long as they live. As life expectancies increase, CPF Life offers a solution to longevity risk, i.e. outliving one’s retirement funds, by pooling the risks of the ageing CPF members. This means there are assured payouts for the longer-lived CPF members, but at the expense of the shorter-lived members.

CPF Life was applicable to CPF members turning 55 years old in September 2009. This year (2019) marks the tenth year of its introduction, and the first time where the entire cohort of eligible CPF members, those who turned 55 in 2009 and will turn 65 in 2019, will start receiving their payouts. To date, the amount of the payouts, which are based on the prevailing CPF Minimum Sum at the point at which the CPF members turned 55 and which have been increasing for each cohort subsequent to 2009, have only been projected by the CPF Board at its website as a range of possible payouts, based on the standard insurance practice of assuming a 3.75% and a 4.75% rate of return. Hence, this is a watershed year where we would be able to see what the payouts of the CPF Life scheme actually are.

2019 marks the tenth anniversary of CPF Life, when the first cohort of CPF members start receiving their CPF Life payouts

#### The Basics

As an illustration, a CPF member born in 1964 and turning 55 this year will have to meet the Full Retirement Sum requirement of $176,000.

55th birthday on or after | Full Retirement Sum |
---|---|

1 July 2009 | $117,000 |

1 July 2010 | $123,000 |

1 July 2011 | $131,000 |

1 July 2012 | $139,000 |

1 July 2013 | $148,000 |

1 July 2014 | $155,000 |

1 July 2015 | $161,000 |

1 January 2017 | $166,000 |

1 January 2018 | $171,000 |

1 January 2019 | $176,000 |

1 January 2020 | $181,000 |

Based on this Full Retirement Sum (FRS), the projected payouts from CPF Life starting from age 65 (in 2029) under the 3 different choice of plans are:

Savings at Age 55 | Your Monthly Payout for Life from Age 65 Onwards | ||
---|---|---|---|

Standard Plan (default plan) | Basic Plan | Escalating Plan | |

Basic Retirement Sum $88,000 | $730 - $790 | $690 - $720 | $570 - $620 (initial sum) Increases by 2% every year |

Full Retirement Sum $176,000 | $1,350 - $1,450 | $1,280 - $1,320 | $1,040 - $1,140 (initial sum) Increases by 2% every year |

Enhanced Retirement Sum $264,000 | $1,960 - $2,110 | $1,860 - $1,920 | $1,510 - $1,660 (initial sum) Increases by 2% every year |

The table above also shows the payouts for the Basic Retirement Sum (BRS) and the Enhanced Retirement Sum (ERS). The payouts for the FRS over time are:

Note that CPF Life payouts differ by gender to account for different life expectancy, as shown below. As females have longer life expectancy, and will get more payments, hence the amount of each payment is lower than for males:

Savings at Age 55 | Your Monthly Payout for Life from Age 65 Onwards | ||
---|---|---|---|

Standard Plan (default plan) | Basic Plan | Escalating Plan | |

Male Full Retirement Sum $176,000 | $1,401 - $1,549 | $1,273 - $1,412 | $1,099 - $1,227 (initial sum) Increases by 2% every year |

Female Full Retirement Sum $176,000 | $1,302 - $1,445 | $1,229 - $1,366 | $999 - $1,119 (initial sum) Increases by 2% every year |

Additionally, should the CPF member pass away earlier than expected after the payouts have commenced, the CPF Life scheme will also pay a bequest to his nominees. The amount of the bequest is the annuity premium paid at age 65, less the payouts already received, so the bequest will progressively decrease according to the age of the CPF member:

Male, FRS $176,000 | Standard Plan (default plan) | Basic Plan | Escalating Plan |
---|---|---|---|

Age 65 | $261,866 - $274,204 | $261,993 - $274,341 | $262,168 - $274,526 |

Age 70 | $177,801 - $181,211 | $229,375 - $241,677 | $193,400 - $197,748 |

Age 75 | $88,218 - $93,736 | $196,606 - $202,933 | $112,979 - $117,475 |

Age 80 | $0 - $9,671 | $145,205 – 155,227 | $19,387 - $33,648 |

The bequests over time would look like:

#### Some Additional Details

So far, everything we have described can be found on the CPF Life website. But there are some finer details on the entire CPF Minimum Sum, Retirement Account, and CPF Life enrollment process which may not be as well described or communicated elsewhere. So let’s look once more at the whole process graphically:

The process can be split into a few stages:

- At age 55, the amounts in the CPF member’s Special Account and then Ordinary account will be placed into the Retirement Account. For a member turning 55 in 2019, if the member has pledged a property, a sum of $88,000 will be placed in the RA, if he has not, a sum of $176,000 will go into the RA
- The money in the RA will then compound at a rate of interest of 6% for the first $30,000, 5% for the next $30,000, and 4% for the remainder over the next 10 years until the member reaches the age of 65. If there are no further top ups made to the RA, this sum of money grows to $271,328 by the time the member reaches the age of 65
- Note that the money in the RA has not yet been committed to CPF Life – should the CPF member pass away before the age of 65, the full amount in the RA (inclusive of interest earned) will go to his/her nominees
- At the age of 65, the CPF member is invited to enroll in CPF Life by choosing the plan (Standard, Basic or Escalating) he/she prefers, and
of the money in the RA is then used as the CPF Life premium. The only choices available to the CPF member at this stage are:*ALL*- whether he/she would like to start the PCF Life payments immediately or defer to a later age (up to age 70)
- the preferred plan (Standard, Basic or Escalating)

- Once enrolled in CPF Life, the monthly payouts will commence, according to the plan chosen – note that CPF Life annuitization rate stated of around 7% refers to the yearly payouts divided by the $271,328 paid into the CPF Life fund. This rate compares very well with commercially available annuities, which payout 5% or less, but is not the highest possible on an actuarially fair basis, because of the bequests which are bundled together with each CPF Life plan
- Once the monthly payouts have started, they will continue for the remaining life of the CPF member. Should the CPF member pass away, say, before the age of 80, his nominees will receive a bequest amounting to the sum of the RA paid into the CPF Life fund of $271,328, less the amounts which have been paid out already as monthly CPF Life payments. Any interest earned on the $271,328 paid into the CPF Life fund will not be paid as part of the bequest. Since the bequests amounts diminish over time, and the life expectancy of a CPF member at the age of 55 is 83 years for males and 87 years for females, in reality, the nominees should expect little if any bequests paid out from CPF Life

#### What We Know Now

We have described and clarified the basic mechanics of the CPF Life scheme. As a retirement annuity product, it would be next to impossible to find any other commercially available annuity which matches up to the CPF Life scheme in terms of the payout amounts and length of payout. This is because as a mandatory scheme, CPF Life does not have to worry about expenses and adverse selection (only people who have longer lifespans buy annuities).

However, CPF Life members will no doubt still have questions about CPF Life, for example:

- Is CPF Life a good investment? What is the return on it, or, what is the value of the monthly payouts compared to the investment of $176,000 made at age 55?
- Should I defer the monthly payouts to start later than age 65? If so, what would be the best age to start the payouts, since deferring the payouts would give me a higher payout?
- Are there potentially ways in which CPF Life can be made even better, and can be considered for future CPF members enrolling in CPF Life?

These are all questions which we will explore further in the next few posts on this blog!

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