When it comes to topping up your CPF account, there are advantages and there are disadvantages.
There are many aspects to consider before you voluntarily top up your CPF account.
Too many Singaporeans make a rash decision without considering the pros and cons.
With that in mind, in my first article, I dealt with the advantages of topping up your CPF account.
Today, I will look into the arguments against it and how you should make your 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 over the past 90 years.
Savvy investors may even be able to achieve better returns than that through good stock picking strategies.
Tax relief is less significant for those with lower income
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 S$40,000 per year, you only hit the 3.5% tax bracket.
And if you earn just S$30,000 or less, your tax bracket is in the 2% range.
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 S$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, meaning you cannot reverse your decision.
The first time you are allowed to access your money would be for retirement when you hit 55 years old.
Even then, you will only be permitted to withdraw a portion of your funds.
This is the higher of S$5,000 from your special and ordinary accounts, or any amount in excess of the full retirement sum (FRS).
The FRS for those who are turning 55 this year stands at S$186,000.
Therefore, you must carefully consider if you can cope comfortably without the amount you are considering to top up in the near future.
Loss of liquidity
Liquidity can be a great asset to have.
Not only does it mean you have enough cash on hand for emergencies, but it also gives you the flexibility to invest in businesses and more leeway to take risks that you otherwise would not have taken.
Having this liquidity on hand can also affect your lifestyle dramatically.
The cash can open up possibilities for you to make lifestyle decisions that you otherwise would not have considered.
Get Smart: Weighing the pros and cons
There is no one-size-fits-all approach to whether you should top up your CPF account.
Doing so is a personal decision based on your long-term financial goals and lifestyle choices.
If you are one who values liquidity more than tax savings, you may wish to hold back on voluntary contributions.
A savvy investor may also find the returns from CPF unattractive as he or she will be able to garner a superior return.
Hopefully, this two-part article gives you a good guide on the pros and cons of each decision.
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Disclaimer: Royston Yang does not own any of the companies mentioned.