The Motley Fool

Should You Voluntarily Put Money Into Your CPF?

Singaporeans and permanent residents who have a CPF account have the option to top up their account voluntarily. This is done for two reasons. First is to increase your nest egg for the future by setting aside more money for your CPF, which you can access at your retirement. The second reason is to reduce your taxable income.

Unfortunately, many Singaporeans may not be familiar with the pros and cons of this voluntary CPF contribution. In light of this, I have decided to discuss the arguments for and against voluntary topping up of your CPF account. This will be split into two articles.

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In this first article, I will describe the arguments for topping up, and the second I will look at reasons why topping up may not be such a good idea.

Tax relief

When you top up your CPF voluntarily, you will be entitled to a tax relief.

For each dollar that you top up, you will reduce your taxable income by that same amount. However, you can only top up a maximum of $7,000 to your own CPF account and another $7,000 to a family member’s CPF account.

For example, you have an income of $300,000. If you decide to top up $7,000 into your CPF account and another $7,000 to a family member’s account, your taxable income will now be $286,000.

This can mean a significant amount of tax savings, especially if your income bracket is in the higher limits. For instance, the highest tax bracket is 22% of your income. To put this into perspective, legendary investor Warren Buffett “only” managed to achieve a 19.8% return per year. Therefore, this shows just how much 22% savings in tax really is.

Furthermore, CPF accounts accrue interest over time. This means that the money you save by not paying tax is growing each year, multiplying the effects of your tax savings.

CPF interest is more than bank interest

Despite CPF interest being fairly low, it is still a bit more than bank interest. Ordinary CPF accounts can return up to 3.5% a year while special accounts can accrue up to 5% a year. At current bank interest rate levels of 1-2%, this can mean a whole percentage point difference.

Wage earners who are not sure how to invest their money or are risk averse may consider topping up their CPF as a good investment option.

Having said that, more savvy investors who are familiar with the stock market and other investment options may not view the CPF interest rates as sufficient and can look for higher-yielding options.

Creates a discipline money saving habit

If you are worried that you might spend your money recklessly and not have enough for retirement, then voluntary CPF contribution might be your answer. By putting more money in your CPF account, you have locked up your savings until your retirement when you will finally be able to access it.

The Foolish bottom line

Wage earners who are wondering if they should top up your CPF account voluntarily will need to consider all facets of the decision. In the next article, I will dig into some arguments against voluntary CPF contribution.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.