Increase in Payouts and Returns, Improved Flexibility: New CPF Life Scheme Introduced

August 5, 20168:57 am1589 views

A new annuity plan has been proposed as an additional option under the Central Provident Fund (CPF) life scheme, wherein payouts will be increased as one ages. However, some members felt this scheme lacked in covering inflation.

As per the scheme, payouts will be increased by 2 percent every year for the rest of CPF member’s life. The advisory panel felt that this would increase the purchasing power of CPF by an average 20 to 30-year average inflation rates.

The caveat is the starting payouts would be lower by about 20 percent than the current default CPF life plan.CPF LIfe Escalating Payouts

CPF Life is an annuity scheme that provides lifelong monthly payouts from age 65. The two existing plans — Standard, which is the default; and Basic — give payouts that remain constant. Standard gives higher monthly payouts and a lower bequest and vice versa for Basic.

Members can avoid the lower initial payouts by either topping up their CPF Life premiums, or by delaying the age they start receiving the payouts, up till age 70. This escalation in the payout structure would help the CPF members to keep up with the rising costs of living.

While the 13-member board plan deliberated on a payout structure to include inflation, however they think such a structure could mean “less certainty to members on their future stream of payouts as the quantum of annual increases would fluctuate from year to year.”

Also some members will not be comfortable accepting lower payouts when there is deflation and costs of living are decreased. Recognizing the long-term inflation rate and impact on payouts, the payout escalation rate and future cohorts can be reviewed periodically.

This plan is designed to help deal with inflation and accept a lower starting payout, while waiting for 25 years before they get a cumulative payout equivalent to those who took up the Standard plan.

See: S$516m in CPF arrears recovered from employers in 2015

The Panel has also recommended introducing an optional investment scheme called the Lifetime Retirement Investment Scheme to cater to members who wish to earn higher expected returns by taking on some investment risk.

The Lifetime Retirement Investment Scheme will offer CPF members access to a small number of low-fee, passively managed investment choices that adopt a long-term investment approach and that will be simpler for members to choose from.

Commenting on the proposal, SIM University economist Walter Theseira agreed with the approach, and told Today Online, “Pegging payouts to inflation means increased risk or variability, which someone has to pay for. Either the CPF member pays for it through lower initial payouts, or the public has to pay for it through promising a subsidy.”

He added: “Basically, the problem is there’s no free lunch with retirement savings, you can’t make money out of nothing.”

Channel News Asia further noted, “In the case of death, all annuity premiums which are not paid out through monthly annuities are bequeathed to members’ loved ones. This means that the bequest under the CPF LIFE plan with escalating payouts will be higher compared to the standard plan in the first few years after payouts start.”

However, this new option would cater to a smaller working group, who would not need higher starting payouts now, but would need a cumulative amount during their retirement period – 60 to 70. The fixed rate of increasing payouts helps members deal with inflation effectively, based on one’ lifestyle choices and expected lifespan.

Also read: 1 in 3 working Singaporean adults not planning for retirement: Survey

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