6 Sep 2024
SOURCE: CPF Board
Nobody can predict how long they will live. This simple fact makes longevity one of the biggest risks and poses a serious challenge for planning one’s retirement.
Some might live well into their 90s or even past a century, while others may have shorter lifespans. This uncertainty makes it difficult for anyone to accurately plan their retirement savings.
If you save too little, you risk running out of money in your later years. Save too much, and you might unnecessarily sacrifice your quality of life in the present.
A significant part of retirement planning is factoring in longevity risk. This refers to the possibility of outliving your retirement savings, which can impact your financial security in your later years.
With CPF LIFE, you can continue to receive monthly payouts no matter how long you live. This national longevity insurance annuity scheme risk-pools the interest earned on the CPF LIFE premiums (the amount of money you pay from your Retirement Account for this insurance coverage) of all CPF LIFE members.
Why should I pool my interest with others?
Risk-sharing is common to all types of insurance, including car insurance (the risk of encountering an accident is shared) and life insurance (the risk of dying is shared).
In the context of CPF LIFE, risk-sharing ensures that CPF LIFE members never encounter a situation where they run out of income in their old age, where income may be hardest to come by.
Importantly, the income that participants receive through risk-sharing in an annuity is also higher than what they would receive if they had to individually stretch their savings to account for the possibility of outliving their life expectancy.
What happens to your CPF savings when they are risk-pooled?
At age 55, your Retirement Account (RA) is created with savings from your Ordinary Account (OA) and Special Account (SA), up to your Full Retirement Sum (FRS). The savings in your RA are then used as CPF LIFE premiums to provide lifelong payouts when you chose to start your payouts anytime from your payout eligibility age of 65 to 70.
Interest earned on your CPF LIFE premiums are pooled with interest earned on the LIFE premiums of other CPF members. Nonetheless, they continue to be factored into your payouts, to enable you to receive higher payouts right from the start. The pooled interest is what allows all members (including you!) to receive lifelong monthly payouts, even after they no longer have any premium balance.
Does pooling interest mean my interest is lost?
The design of CPF LIFE ensures members will get back at least the dollar amount of premiums via either payouts and/or bequests. What is shared, or “pooled” among members, is thus the interest earned on the annuity premiums.
However, the “interest pooled” is not entirely lost to others. Firstly, it has been factored into your payouts from the start. Secondly, depending on your longevity, you may ultimately receive more than the amount of interest that you contributed to the pool. This is because once the sum of your annuity payouts has exceeded the dollar amount of premiums originally committed, any further payouts are effectively drawn from your, as well as others’, pooled interest.
Common misconceptions about CPF LIFE and risk-pooling
1. My CPF LIFE premium do not gain any interest
Your CPF LIFE premium will continue to earn 4% base interest and up to 2% extra interest (on the first $60,000 of your combined CPF balances) similar to the RA savings.
The interest is factored into your monthly payouts, allowing you to receive higher monthly payouts from the start and for as long as you live, even when your CPF LIFE premium has depleted.
2. My CPF LIFE premium will be distributed to other CPF members after my death
If you pass away before your CPF LIFE premium is depleted, your beneficiaries will always receive any remaining unpaid CPF LIFE premiums together with any remaining CPF savings. This means that you will get back your CPF LIFE premium in full, either through payouts while you are alive, or a lump sum distributed to your nominees upon your passing.
However, the interest on your CPF LIFE premium that has not been paid to you is pooled and goes towards providing monthly payouts for surviving CPF LIFE members.
3. Private annuities are more attractive than CPF LIFE
CPF LIFE offers one of the highest payout for every dollar committed compared to other private annuities.
Unlike private annuity plans, which are subject to investment market returns and risks, CPF LIFE monies are guaranteed by the government and earn a risk-free interest of up to 6% per annum.
Additionally, as a non-profit scheme administered by the CPF Board, CPF LIFE does not incur costs from advertising and agents' commissions. As a national scheme with the largest member pool in Singapore, it is able to spread out longevity risks and costs more effectively.
Read more from Christopher Tan, CEO of Providend, on why he thinks CPF LIFE is the best annuity plan in Singapore.
Increasing your CPF LIFE monthly payouts
You can plan your retirement payouts with the CPF planner - retirement income. This useful tool projects your retirement payouts at 65 and allows you to simulate CPF actions (e.g. Top-ups) to see how you can maximise your retirement payouts.
You can also increase your CPF LIFE monthly payouts through the following ways:
1) Top up to your CPF savings with the Retirement Sum Topping-Up Scheme
You or your loved ones can make cash top-ups and CPF transfers to your SA (up to FRS) or RA(up to the current Enhanced Retirement Sum). The more savings you use to join CPF LIFE, the higher your monthly payouts.
2) Deferring your monthly payouts up to age 70
You are eligible to receive your CPF LIFE payouts at age 65. However, if you are still working or have other sources of income, consider deferring your payouts.
For every year you defer, payouts will increase by up to 7%. This means if you choose to defer until 70, payouts will increase by up to 35%.
Learning more about how CPF LIFE works with risk pooling
It’s important to understand that CPF LIFE is an insurance scheme, and not an investment product.
Risk pooling insures you against running out of your retirement savings and provides you with monthly payouts no matter how long you live. This makes CPF LIFE a reliable foundation in your retirement planning.
The information provided in this article is accurate as of the date of publication.
