As the population gets financially educated especially when it comes to the usage of CPF, the idea of CPF-SA shielding is gaining traction. Some says it is a “loophole” and wants this to be closed. Personally, I think it is weird to call it that way. It is like calling investing a loophole because it helps you achieve financial freedom.
If you have read my articles before, you would be aware that context is very important for planning and today’s focus will be the 3 things to know before you do CPF-SA Shielding.
What is CPF SA Shield?
At age of 55, your Retirement Account (RA) will be funded from your Special Account (SA) first and then your Ordinary Account (OA) to make up Full Retirement Sum (FRS).
Read More: 5 Things You Need To Know About Your CPF
As SA gives 4% interest as compared to OA 2.5%, there is an interest (pun intended) to keep monies in SA. The idea of CPF-SA shielding is to fund your RA with more of your OA than SA by transferring your SA monies out temporarily.
So what can go wrong?
Read More: 5 mistakes people make using their CPF
Context. It is always about context. In my own opinion, not everyone should/can do shielding.
Context #1: Paying For Mortgage Using CPF-OA
Your CPF-OA contribution rate at age 56 is 12%. Using an salary of $6000 (Ordinary Wage Ceiling is $6000 anyway), $720/month goes into your CPF-OA. If your monthly mortgage is > $720/month, you might be using your previous CPF-OA contribution if you don’t want to use cash. (There is a whole literature on why you should use cash but we will leave it for another discussion).
When you do CPF-shielding, your CPF-OA balance drastically reduces and this might mean that you would need to use cash for your mortgage. This might adversely affect your cashflow in future.
Context #2: It Assumes You Know Where to Park your Money Temporary
There are several instruments that you can consider purchasing using your CPF-SA. Different investment carries different risk. It is most important to know your own risk profile or work with someone who can do that for you. Even money market funds carries it’s own unique set of risk. Please take time to understand the benefits and risk of your chosen funds.
To illustrate an example: Mr Suay bought $100,000 worth of Singapore Bond Funds using his CPF-SA to do shielding at the age of 54. Before Mr Suay could sell the Singapore Bond Funds, there was an economic crisis. Typically, volatility of bond funds are not high. However, because of the crisis, Mr Suay may see his Singapore Bond Funds be worth $90,000 now. Mr Suay may experience losses if he wishes to sell it and put it back into his CPF-SA.
And yes, there may be transaction costs involved. Please do the calculations to see if it is worth it.
Sidetrack: It is only when you know what the risk is, then you can learn how to manage those risk. It might be unwise to avoid risk altogether.
Context #3: If you are risk adverse
Every trained financial professional will be able to find out your risk profile by doing a questionnaire. If you happen to be a risk adverse individual, this might not be the best strategy for you.
It is okay to be risk adverse. I think everyone of you will have a different experience with money. There is nothing wrong planning your financial journey as a risk adverse individual. It just means the instruments that you will be using will be different from the rest. There is nothing wrong with that. You are uniquely you.
I believe that are merits of doing CPF-SA shielding if done well. The most important consideration is to see if this strategy makes sense to you. The context of the strategy is very important. It may not be applicable to some out there especially if they fall into #1, #2 or #3 as explained above.
If you wish to find out if CPF-SA shield is applicable for you, please do reach out to me.
Till then, take care!
Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.
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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.