One key highlight of Budget 2023 is the coming changes to the CPF contribution ceiling. In order to help Singaporeans save more for retirement, the salary ceiling will gradually go up from the current level of S$6,000 to S$8,000.
What does this change mean for the average Singaporean? And for that matter, what else should you know about CPF contributions in 2023?
Increase in CPF Contribution Salary Cap
Starting this year, the CPF contribution salary cap will be gradually increased to a new limit of S$8,000. To help employers and workers adjust to the new salary cap, the change will take place over four stages, as follows:
This change is significant due to the effect it will have throughout the workforce.
Most notably, the cost of labour will increase for employers, as companies have to make a contribution to their employee’s CPF account equal to a percentage of their gross salary.
Raising the salary cap to S$8,000 means that companies have to pay more in CPF contributions, and for longer.
How Raising the CPF Salary Cap Will Impact Singaporeans
Raising the CPF salary cap will result in a reduction in take-home pay. While this may sound alarming, the impact may not be as serious as thought.
Firstly, the change only affects those who are currently earning between S$6,000 and S$8,000 per month. Those who have yet to reach this income level will not see any changes to their take-home pay.
Secondly, while nobody relishes the idea of having less money to meet their daily expenses, how much will take-home pay actually be reduced? Let’s find out with some rough calculations.
Let’s assume you currently earn S$6,500 per month. As the CPF contribution cap is S$6,000 at present, you only need to contribute 20% of S$6,000 to your CPF account. No deduction is required on the remaining S$500.
Hence, your current take-home pay is (80% x S$6,000) + S$500 = S$5,300
Now, here’s how your take-home pay will change as the salary cap goes up.
|Salary cap||Take-home pay|
|Sep 2020: S$6,300||S$5,240|
|Jan 2024: S$6,800||S$5,200|
|Jan 2025: S$7,400||S$5,200|
|Jan 2026: S$8,000||S$5,200|
In our hypothetical scenario, the difference in take-home pay amounts to S$100 by Jan 2024. There is no further impact beyond that, as long as the salary remains the same.
Indeed, the individuals most impacted by the change are those who are already earning S$8,000 or more per month. Their take home pay will be reduced from S$6,800 to S$6,400 by Jan 2026.
That’s a S$400 difference each month, which is not insignificant, especially if both breadwinners are affected. Hence, those who find themselves in this salary range should take steps to make adjustments earlier rather than later.
But it’s also important to bear in mind that what you lose in take-home pay, you gain in your CPF savings. The S$400 (or even S$100) more saved every month will grow through the power of compounding interest, and will eventually be used to help meet your retirement needs.
|CPF account||Interest (per annum)|
|Retirement Account (age 55 onwards)|
No changes were announced for CPF interest rates. Your CPF balances will grow at a base interest of 2.5% per annum for funds in your Ordinary Account (OA), and 4% per annum for funds in your Special Account (SA), Medisave Account (MA), and Retirement Account (RA) – the latter is created for you upon turning 55 years old.
You will also be granted extra interest based on your 1) account balance and 2) age. In short, you will gain 1% extra interest on your OA account if you’re below 55 years old and have less than S$20,000 saved therein. Your SA and MA accounts will also earn additional 1% interest as long as your total CPF monies are below S$60,000.
If you’re above 55, you will get an extra 2% interest on the first S$30,000 of your combined CPF balance (capped at S$20,000 for your OA), and an extra 1% interest on the next S$30,000 of your combined balance. Once your total balance exceeds S$60,000, your interest will revert to the base rates for respective accounts.
Indeed, it’s not exactly straightforward. And to make matters even more complicated, that 1% extra interest you earn on your OA will be transferred to your MA account (if below 55) and to your RA account (if above 55).
Why should you pay attention to your CPF interest rates? Well, doing so will help you make an informed decision whether to invest your balances via the CPF Investment Scheme for potentially higher returns.
However, do remember that CPF returns are guaranteed, but investment returns are not. Hence, if the investments you are thinking of buying have historically similar returns to CPF base interest rates, it’s better to simply leave your balances alone to earn the guaranteed returns.
What Are the CPF Voluntary Top-Up Limits?
For those that believe in the slow, sure and steady path offered by the CPF scheme, you might be interested to know that you can voluntarily make top-ups to your CPF balances to maximise your returns.
You can choose to make cash top-ups to all three of your CPF accounts (OA, SA and MA), or transfer the funds in your OA to your SA or RA (under the Retirement Top-Up Scheme). You can also choose to make top-ups to your MA to better meet your healthcare expenses.
Besides topping up your own accounts, you can also make cash contributions to your loved ones, spouse and children’s accounts.
Note that there are limits to how much you can voluntarily top up, as follows:
- Annual limit: Difference between CPF Annual Limit (S$37,740) and the mandatory CPF contributions made for the calendar year. Any excess will be refined in the following year without interest.
- Overall limit:
- Up to Full Retirement Sum (S$192,000) in SA when below 55
- Up to Enhanced Retirement Sum (S$288,000) in RA when 55 or older
What Are the Advantages of Voluntarily Topping Up Your CPF Accounts?
The prime benefit is to take advantage of the guaranteed returns offered by the CPF scheme to grow your retirement savings.
In addition, certain types of top-ups will also entitle you to tax relief of up to S$16,000 per year – up to S$8,000 for topping up your own account, and a further S$8,000 for topping up accounts of family members and loved ones.
Notwithstanding the above, it’s important to know that CPF voluntary top-ups (including transferring your OA funds to SA or RA) is strictly non-reversible. You should only make top-ups using funds that you do not need for the foreseeable future.
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