CPF Life: An Update for 2020
The very first topic covered in this blog was on the Central Provident Fund (CPF) and its role in retirement. In particular, we focused on CPF Life (Lifelong Income For the Elderly) which is the annuity offered to CPF members. On 1 Jan 2020, the Full Retirement Sum (FRS) for CPF Life has been raised to S$181,000 from S$176,000 previously. With this higher amount, we also expect higher payouts in the future. As a result, this is a good time to have an update on CPF Life for 2020.
Previously, we had covered:
- CPF Life: A Primer on Retirement, which looks at how the CPF Life Scheme works
- CPF Life: Is it a Worthwhile Investment? which introduces a way to calculate the value of the CPF Life Scheme. CPF Life turns out to be fairly valued, and is indeed value for money. Simply put, CPF Life is the best annuity money can buy in Singapore
- CPF Life: Should I defer the payouts to age 70? which considers whether a retiree should delay receiving the CPF Life payments from age 65 to up to age 70, in order to get higher payouts. The answer is no, since we do not expect to live long enough to benefit fully from the the higher payouts
In addition, by way of background, How does and Annuity Work? shows how an annuity like CPF Life can guarantee payments as long as you live. We also cover how to use an annuity like CPF Life with other investments to create a foolproof retirement plan in The Yield Shield, 4 Percent Rule and CPF Life – A Perfect Retirement Combo? which meets our personal retirement goals, as explained in Retirement Goals, and How to Get There.
What’s New and Updated for CPF Life in 2020?
So, what is new for the CPF Life update in 2020? For a start, the Full Retirement Sum is now S$181,000, from S$176,000 previously. Th higher FRS applies to CPF members turning 55 in 2020. This is a 2.85% increase, and is lower in percentage terms relative to previous years. It also corresponds to roughly the same percentage increase in the payout amounts after the age of 65.
Overview of CPF Life Payouts based on FRS of $181,000
As the payouts are actuarially fair, they differ for males and females, on account of females having longer life expectancy:
CPF Life Payouts and Bequests for Males
CPF Life Payouts and Bequests for Females
We revisit our previous analysis on the value of CPF Life here. Also, we consider whether it is better to start receiving the payouts at age 65 or delay them too.
But to give credit where it is due, the CPF Board has also made some much welcome improvements to the CPF Life website and online calculator. These changes have been more in substance rather than in form.
Online CPF Life Estimator
At the top of the CPF Life Estimator, there is a box to choose the age at which payouts start. This can be set between 65 to 70, and shows how the payouts increase when we defer the payouts. It also shows how the bequest amounts change over time depending on when the payouts start. This is something which as not been shown by the CPF Board before. With this tool, we can now see that deferring the age of the payouts do not affect the maximum age the bequest is available for. For example, under the Standard Plan, the bequests end at age 80, regardless of whether the payouts started at age 65 or 70. The only difference is the bequest amount.
At the bottom of the CPF Life Estimator, we see an explanation for the payouts projected. The range of payouts corresponds to interest rates of 3.75% and 4.25% respectively. This is much like how a benefits illustration for a life insurance product is shown. The higher payouts are based on an interest rate of 4.25%, which is the blended interest rate currently payable on the Retirement Account (RA). This comprises of the 4% RA rate, the additional 1% for the first $60,000 balance, and the additional 1% for the first $30,000 balance.
The more interesting disclosure is that the lower payout corresponds to an interest rate of 3.75%. If we use the same logic for the 4.25% rate, this means that the CPF Board might pay a base rate of 3.5% on the RA balances in the future. This is somewhat worrying, as we may have come to expect the 4% RA rate to be set in stone. However, the likelihood of this happening seems low at the moment. The CPF Board has had no problems paying 4% over the past decade, when global interest rates were lower than what they are today.
So is CPF Life still a worthwhile investment in 2020?
Using the same methodology for valuing the expected future payments from the CPF Life Scheme in CPF Life: Is it a worthwhile investment?, is it still a worthwhile investment in 2020? The value of the CPF Life Scheme for males and females we show below do not differ from our previous conclusions that you get what you pay for:
Present Value of CPF Life at Age 55 for Males
|Full Retirement Sum Plan|
|Present Value at Age 55||% Value form Monthly Payments||% Value from Bequest|
|Standard||$168,289 - $184,116||82.9%||17.1%|
|Basic||$178,849 - $194,859||71.3%||28.7%|
|Escalating||$163,392 - $179,958||80.7%||19.3%|
Present Value of CPF Life at Age 55 for Females
|Full Retirement Sum Plan |
|Present Value at Age 55||% Value form Monthly Payments||% Value from Bequest|
|Standard||$166,014 - $183,045||89.4%||10.6%|
|Basic||$176.754 - $193,265||80.1%||19.9%|
|Escalating||$159,999 - $177,859||87.6%||12.4%|
As before, the present value of the CPF Life Scheme is slightly higher than the FRS of $181,000 for both the Standard and Basic Plans, assuming a 4.25% interest rate. For the Escalating Plan, the present value is somewhat lower, but it is also harder to replicate. This means that CPF Life is fairly priced, and we can expect to get what we put into it. While the Basic Plan has the highest present value of all, more of the value comes from the bequests. Given our propensity for a long life, it is unlikely that a significant amount will be received in a bequest. So from this point of view, the Standard Plan probably still gives better value.
Comparing the present value of CPF Life against the FRS of $181,000, the net present value is close to zero. This is not a concern, because an annuity like CPF Life is first and foremost a hedge against longevity risk. Good hedges structured using insurance or derivatives usually have zero net present values, just like an interest rate swap or a foreign exchange forward. This means that the CPF Board is not earning any profit from the CPF members.
CPF Life payouts are actuarially fair. They are worth exactly the value of the FRS of $181,000 put into the Retirement Account.
Since we should not be engaging in speculation with insurance products, we should recognise that this is a fair hedge. This is something which we cannot say for any other annuity from a commercial insurance company. Unlike the CPF Board, a commercial insurance company needs to pay expenses and commissions. It also needs to earn profits for the shareholders, so commercial annuities are usually negative net present value for the buyer.
Should I defer the CPF Life payouts to age 70?
The second question to answer about the CPF Life update for 2020 is whether we should defer the payouts until age 70. Deferring gives us a higher payout, at the risk that we do not live long enough to benefit from it. We show this in the table below:
Relative value of payouts when deferred by age
|Age when payments start||Male Full Retirement Sum|
As discussed before in CPF Life: Should I defer the payouts to age 70?, deferring the CPF Life payouts past the age of 65 is not a good idea. The idea is that even though we get higher payouts, we do not live long enough to enjoy them fully! So the conclusion still stands – start the CPF Life payouts as soon as you can at age 65. Even if you are still in employment and do not need the CPF Life payouts, it is far better to have them as cash in hand (or in your bank account) rather than leaving it with the CPF Board.
It is better to start CPF Life payouts at age 65 than to defer them for a higher payout
In summary, when we look at the update for CPF Life for 2020, what do we see?
- The FRS has gone up to $181,000, but the value of the CPF Life Scheme has gone up too. Net, you still get your money’s worth.
- The CPF Life Scheme is fairly priced. It offers better value for money than any other annuity available. It is also 100% effective as a hedge against living too long and running out of money.
- While the CPF Life payouts increase by 7% per year you defer the payouts after age 65, there is no point in deferring. You get better value by starting the payouts at age 65.
- The CPF Board has improved its website, and is able to communicate the details of the CPF Life Scheme better now.
So do not worry about your CPF! It is in good hands for now!