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Arguments Against Voluntary CPF Contribution

There are many aspects to consider before you voluntarily top up your CPF account. Too many Singaporeans may make a rash decision without considering the possibilities. Even worse, some may not even know that this possibility exists.

With this in mind, I decided to write a two-part article on the pros and cons of voluntary CPF contribution.

In the first article, I dealt with the advantages of topping up your CPF account. In this article, I will look into the arguments against it and how we should make a decision.

CPF interest rates are lower than stock or property returns

At a maximum 3.5% interest per year for the CPF ordinary account and 5% a year for the special account, savvy investors may not see the appeal of such low yield.

To put this into perspective, the S&P 500, a widely used American stock index, returned 9.8% per year.

Savvy investors may even be able to achieve better returns than that through good stock picking strategies.

Tax relief may not be so significant to lower income bracket

In the first article, I mentioned that for high-income earners who are in the top tier of the tax bracket, the tax savings could be significant.

However, if your income is below $40,000 per year, you may only be paying 3.5% in tax. Saving that amount of tax will not be a significant amount, considering you can earn that back through better investment returns than what your CPF account allows.

Even at the next tier of $80,000 per year, where income is taxed at a 7% rate, the cost savings in tax may not be substantial enough for you to wish to lock up your money in the CPF fund.

No return policy

You should be extremely comfortable with your decision before topping up your CPF account. Once you have done so, there is no turning back, and you cannot reverse your decision.

Therefore, you must carefully consider if you could cope comfortably without the amount you are considering to top up.

Loss of liquidity

Liquidity can be a great asset to have. Not only does it mean you have enough cash on hand for exigencies, but it also gives you the flexibility to invest in businesses or make risky career moves that you otherwise would not take.

Having this liquidity on hand can also affect your lifestyle dramatically, and possibly allow you to make lifestyle decisions that you otherwise would not.

The Foolish bottom line

There is no one-size-fits-all answer to whether we should top up our CPF account. Each of us should make a personal decision based on our financial goals and lifestyle choices. Hopefully, this two-part article gives us a good guide on the pros and cons of each decision.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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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.