What are the Pros and Cons of Using CPF Life?

Should Singaporeans rely on CPF Life alone to meet all their retirement needs? Here are the pros and cons of doing so.

It wasn’t so long ago that CPF Life inspired some lively discussion among Singaporeans revolving around the exact use and purpose of the scheme.

Perhaps because of the choice of certain key phrases and the way the programme is structured, concerns were raised over whether Singaporeans would be able to get at our hard-earned money upon retirement. (To be fair, that’s a totally valid concern.)

The short answer is: yes. (See below for the longer answer.) Here’s a closer look at CPF Life, its strengths and weaknesses, and how you can best use your CPF Life payouts during your retirement.

What Exactly is CPF Life?

CPF Life is nothing new. When it became apparent that the average Singaporean is increasingly unable to cope with retirement, the CPF Board started looking for ways to help members secure their golden years.

The obvious answer was to buy into a collective scheme in exchange for a payout for life. This is also known as an annuity plan, and you may have come across some of these as 'retirement plans' sold by insurance companies.

CPF Life is a national annuity plan into which all eligible members are automatically enrolled.

Now, because it is a universal law that you cannot get anything for nothing, all annuities are based on a fund or other investment instrument. The returns from this instrument are what enables the annuity plan to provide regular payouts. This holds true whether you’re talking about CPF Life or any other annuity plan in the market.

However, CPF Life is the only annuity plan in Singapore that is underwritten by the Singapore Government. This allows CPF Life to provide the best returns as far as annuities go.

The Pros of CPF Life

The first (and most obvious) advantage of CPF Life is that you don’t have to pay any extra money to benefit from it. This is because CPF Life is funded using the savings in your Ordinary Account and Special Account. The moment you reach the qualifying age with sufficient money in your CPF account, you’ll be automatically enrolled.

The second benefit of CPF Life is that it provides a monthly payout until death. This can go a long way in helping you retire. Now, whether the CPF Life payouts are sufficient to retire on is a complex issue best discussed in a future article.

How much you will receive per month will depend on 1) whether you choose the Basic or Standard plan, and 2) whether you manage to save up the Basic Retirement Sum (S$83,000 as at 2017).

But don’t worry, you’ll receive a monthly payout even if you have less than the magic S$83,000. You can choose to stay on the Retirement Sum Scheme and get payouts for about 20 years, or you can opt to enrol in CPF Life for lifelong payouts.

One important clarification to make here: any unused premiums at the point of death will be refunded to your Retirement Account and disbursed to your beneficiaries, along with any remaining monies. That’s to say, you’ll get your money back, one way or the other.

The Cons of CPF Life

By guaranteeing members a lifelong payout, CPF Life fulfils its purpose as an annuity plan. However, when compared with other plans in the market, CPF Life falls short in some aspects.

Firstly, CPF Life provides a more-or-less fixed* payout each month for the duration of your life. However, there is no option to adjust the payouts to keep pace with inflation, so you may find it more difficult to get by as time goes on.

(*CPF Life payout amounts are not fixed; they may be adjusted upwards or downwards according to factors that impact the scheme, such as higher than expected returns, or increases in longevity.)

Other annuity plans provide the option for you to increase your payouts year-on-year. This means you will be provided with extra funds which you can use to cope with increases in daily costs.

Secondly, CPF Life does not cater to other old-age needs, foremost of which are the increased risks of contracting a critical illness and becoming permanently disabled.

If you sign up for an annuity plan with an insurer, you can opt to add a rider for critical illness or total and permanent disability. Some annuities even come with these coverage included, saving you the trouble of adding riders. Yet others boost the monthly payouts to help your family cope with the added burden of becoming disabled and requiring long-term care.

Thirdly, CPF Life is focussed on providing for retirement needs of members, but not for the future needs of dependants. Only the unused portions of premiums will be refunded upon death, which means that 1) any sum left is not likely to be significantly large, and 2) the bequest amount dwindles with time.

In comparison, market annuity plans come in a variety of structures, giving you more flexibility to meet your goals.

For instance, you might consider getting an annuity that pays out for 20 years. At the end of this fixed-payout period, you will then be awarded a lump sum longevity bonus to help fund your remaining years.

Because this lump-sum benefit comes toward the end of the plan, there is a higher possibility of leaving a larger sum to your descendants.

Also, there are annuity plans offered on a ‘premium guaranteed’ basis. What this means is that upon death, you will be refunded any premiums previously paid in the form of a death benefit.

Combine CPF Life With Another Annuity Plan

As we’ve discussed above, CPF Life is not designed to cover every need of retirement. There are certain issues and scenarios that will become more pressing as you enter your golden years, and relying on CPF Life alone would be unwise.

Instead, consider purchasing another annuity plan to further secure your retirement. You can always combine the payouts from both CPF Life and your annuity plan for a more comfortable and enjoyable retirement.

Meanwhile, you can purchase riders on your annuity plan to cover yourself and your family against critical illnesses, total and permanent disability and any other medical or old age needs.

Speak with a licensed financial planner to help you pick the best annuity plan suited to your goals and needs. They may also be able to provide you with some other ideas for retirement planning in Singapore.

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