Sell HDB, top-up CPF, get cash bonus?

I refer to the article “Silver Housing Bonus and Lease Buyback schemes enhanced” (Channel NewsAsia, Dec 28).

Use your cash to top-up CPF to get cash bonus?

It states that “Two schemes aimed at enabling senior citizens to monetise their flats have been made more attractive following public feedback.

The Silver Housing Bonus, which provides an incentive for lower-income households to move to a smaller flat, will have a lower top-up requirement of S$60,000 per household. When first announced in February this year, the requirement was for all net sale proceeds to be used to top up the CPF Retirement Accounts to the prevailing minimum sum. The S$20,000 bonus seniors get for topping up their Central Provident Fund Retirement Accounts by S$60,000 will be paid in cash; previously S$15,000 was in cash while S$5,000 went to top up the CPF account.

Those whose CPF top-ups from downsizing their homes are less than S$60,000 will receive less cash bonus – S$1 for every S$3 topped up.”

Although there are four examples on how the Silver Housing Bonus (SHB) works in the Ministry of National Development’s press release, let me just for the sake of simplying matters, use one of the four examples to show the possible implications for lower-income elderly Singaporeans who are being encouraged to opt for this scheme.

SHB Example 4: Net sale proceeds of less than $60,000; Couple

  • Husband and wife, Singapore Citizens, age 56
  • Joint lessees of 4-room HDB flat in Woodlands; sell for $410,000
  • Buy 3-room resale HDB flat in Woodlands for $300,000
  • Husband and wife’s CPF Retirement Accounts starting balance: $20,000

 $30,000 less cash to get $45,000 more CPF?

What the above example may mean is that instead of having $45,000 cash and $50,000 CPF after downgrading to a smaller HDB flat, by opting for the SHB, the elderly couple would be left with just $15,000 cash and $95,000 CPF.

Although the total sum (cash and CPF) is $15,000 more under the SHB, the cash available is $30,000 less.

So, would you opt in to the SHB and be left with less cash?

Floor rate drops to 2.5%?

All these sound rather good, except that the floor rate on the Retirement Account will be 2.5 instead of 4 per cent from 1 January 2014.

Hence, if the current average yield of the 10-year government bond plus 1 per cent remains at below 2.5 per cent into the future, the CPF Life monthly annuity payouts may be much less as they are projected on 4 plus/minus a quarter per pent.

Enhanced scheme requires less CPF top-up?

Since the above SHB is an enhanced scheme, is it any wonder that as I understand it, very few opted for the SHB when it was originally announced in the Budget, because the original CPF top-up requirement was up to the full prevailing Minimum Sum of $278,000 for a couple, instead of the minimum of $60,000 now.

HDB Lease Buyback Scheme also enhanced?

As to “The Enhanced Lease Buyback Scheme, launched in March 2009, applies to seniors in three-room or smaller flats. It will require seniors to use net proceeds – from selling part of their flat leases back to the Government – to top up their CPF Retirement Accounts. They can now get to keep up to S$100,000 of the proceeds in cash after topping up their Retirement Accounts to the prevailing minimum sum. If the household’s CPF top-up is S$60,000 or more, it will receive a S$20,000 bonus. Previously, those under the scheme could only get a maximum of S$5,000 in cash, with the rest going to buy a CPF annuity plan.

The eligibility criteria for the Lease Buyback Scheme has also been relaxed. Households that have enjoyed more than one housing subsidy and ex-private property owners are now eligible. Those with over S$5,000 in outstanding loans will no longer need to have a minimum amount of net proceeds from selling part of their leases to qualify”, let me use one of the two examples given to illustrate the possible implications.

Enhanced LBS Example 1:
Unable to top up to specified top-up requirement in full

  • Husband and wife, age 63
  • Joint lessees of 3-room HDB flat with 70-year lease remaining
  • Net proceeds from tail-end 40-year lease: $138,000 (no outstanding loan)
  • Specified top-up requirement for both: $139,000 (prevailing Minimum Sum applicable between 1 July 2012 and 30 June 2013)

What the above may mean is that you give up your HDB flat to the HDB after continuing to stay in it for the next 30 years, in return for $20,000 cash and $138,000 top-up to your CPF under the CPF Life scheme to get a monthly life annuity.

Now, if your 3-room HDB flat is now worth say $360,000, at 5 per cent annual appreciation, it may be worth about $1.6 million 30 years later.

So, in a sense, you may have given up the equity of your HDB flat ($1.6 million) in exchange for $20,000 cash and a monthly life annuity of about $750 and to be able to stay in the flat for 30 years.

Looking at the above numbers, wouldn’t it make more financial sense for some people, to rent a room out for extra income instead? – Without the problem of what happens if you are still alive after 30 years – no roof left! No more equity left also!

If we assume the renting out of a room is at $600, at say 5 per cent annual appreciation, it may exceed the fixed $750 life annuity, after about 5 years and beyond.

In a typical reverse mortgage in other countries, one can continue to live in the same house for as long as one lives, and the house value at death less the annuity withdrawn and accrued interest, is available to the deceased’s estate.

Cash poor, CPF rich?

Why is it that at the end of the day, practically every scheme that has been introduced to help lower-income Singaporeans retire, makes them more cash poor, but “CPF rich”?

Leong Sze Hian

About the Author

Leong Sze Hian has served as the president of 4 professional bodies, honorary consul of 2 countries, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been a radio talkshow host, a newspaper daily columnist, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), Hotel Mumbai (associate producer), invited to speak more than 200 times in about 40 countries, CIFA advisory board member, founding advisor to the Financial Planning Associations of 2 countries. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.