COMMENT Singapore’s CPF (Central Provident Fund) Act was amended in August 2010. What are the implications for Malaysians?

I know many Malaysians who have left their CPF accounts in Singapore after going back to Malaysia, because the Singapore dollar has appreciated by more than 130 per cent since 1965, when the ringgit and Singapore dollar were on par.

Another reason being that the CPF Special (SA), Medisave (MA) and Retirement (RA) accounts also pay a reasonably high interest, relative to bank deposit interest rates in Malaysia, of 5 percent on the first S$60,000 (RM139,193) and 4 percent on the amount above S$60,000 (RM139,193).

However, Malaysians who may not be following CPF changes closely should note that the guaranteed minimum rate of 4 or 5 percent will end this year. From 1 January 2011, the SA, MA and RA accounts’ rate will be pegged to the average yield of 10-year Singapore government bonds.

In this connection, since Jan 1, 2008 the pegged rate has always been below 4 percent. Even the latest 20-year Singapore government bond (that is 10 years longer) auction had a cut-off yield of only 2.91 percent.

In other words, the floor rate (minimum rate) on these accounts in the future will be just 2.5 percent, or 3.5 percent on the first S$60,000.

CPF savings left unclaimed for six months upon a CPF member’s death will be moved into the Ordinary Account (OA), that pays a lower interest than that for the SA, MA and RA accounts.

I am somewhat puzzled as to the rationale for the OA’s lower 2.5 percent interest, compared to the 5 percent on the first S$60,000 and 4 percent on the balance in the other accounts that remain unclaimed.

Why penalise the claimant with the lower interest; it is perhaps already bad enough that claimants – for possibly reasons beyond their control and of no fault of theirs – may already be disadvantaged by the delayed claim per se?

Every dollar of interest lost due to the reduced interest may make a difference for nominees who may be widows and orphans from lower-income families.

Beware auto-inclusion

After seven years, any unclaimed CPF monies will go to the Singapore government. However nominees who eventually discover this oversight after seven years may still re-claim the amount.

I believe some of the cases of unclaimed CPF beyond six months of death may belong to Malaysians who are no longer in Singapore, or where nominees’ Malaysian addresses may have changed.

Malaysian CPF account holders should ensure that their address as well as their nominees’ addresses are updated in the CPF board’s records. This is important, as CPF nominations are secret, and thus only nominees will be notified and not the deceased’s next-of-kin. The CPF board will not divulge the nominees’ identity to family members.

Malaysians who have less than S$40,000 (RM92,795) in their account and thus are not compulsorily enrolled into the new CPF Life scheme, need to be aware that if their account balance exceeds S$60,000 (RM139,193) at 65, they will now also be auto-included.

This auto-inclusion may mean that lower income Malaysian retirees may have lower monthly CPF payouts at 65, because the CPF Life annuity monthly payout may be lower than the original CPF Minimum Sum Scheme payout.

Based on the projected RA interest of 5 percent on the first S$60,000, a person with S$36,835 or more at 55 may hit at least S$60,000 at 65.

For those who continue to work and have CPF contributions after 55, many more of those with less than S$36,835 at 55 may also hit the threshold at 65.

For example, a person with S$25,000 (RM57,997) at 55, and monthly CPF contribution of S$122 (RM283) will grow to S$60,000 at 65.

Therefore, if Malaysians wish to withdraw their CPF entirely and not return anymore to work in Singapore, they should try to do so before 65, even if they have less than S$40,000 at 55.

In this regard, Malaysians may in a way be better off than Singaporeans, who can only withdraw their CPF in entirety if they give up their citizenship.

Phasing out yearly withdrawals

Malaysians who have pledged their property in Singapore for their short-fall in the CPF Minimum Sum (MS) – currently S$123,000 (RM285,346) – also need to know of another amendment: they may no longer be able to make yearly withdrawals on their CPF contributions after 55, under the old 50, 40 and 30 percent withdrawal rule.

Their case may now depend on the year they attained 55. The withdrawal rule will also be complete phased out by 2013.

This may also mean less bequest to nominees upon death, depending on which CPF Life plan is chosen. Where no election is made, the default CPF Life Balanced plan will apply. This plan generally has a relatively low bequest.

The above also applies to Malaysians who do not pledge property, but have a MS shortfall at 55.

Those who opt to pay CPF death proceeds to nominees’ CPF accounts instead of cash should also be mindful that this may cause some hardship to nominee should they need a sum of hard cash, say for a medical emergency. This is because withdrawals from CPF are subject to the CPF rules that may change in the future.

‘Life’ not so good?

The amendments to the CPF Act may in totality signal a significant departure from a fundamental principle: that CPF members should be allowed to withdraw at least a minimum monthly payout to enable the member to survive.

Historically, and up to now, a minimum monthly payout adjusted for inflation is given to members regardless of how little one has in his or her CPF at the draw-down starting age.

However, with CPF Life, the monthly life annuity is simply pegged to the CPF balance one has, without any consideration as to how little the monthly payout may be.

To illustrate this with an example, S$60,000 in CPF at 65 may pay a monthly life annuity of about S$330 (RM766), when the “minimum monthly payout to enable the member to survive” may be say S$850 (RM1,972).

So, instead of withdrawing S$850 monthly for about seven years, one would get about S$330 for as long as one lives, under the CPF Life scheme. But how does one survive on just S$330 a month?

Finally, Malaysian CPF account holders should note that entry into the new CPF Life scheme at 55, or auto-inclusion at 65, is irreversible.

In other words, the option to withdraw one’s CPF when one leaves Singapore permanently may no longer be available or viable, as at most the amount that can be withdrawn may only be the residue surrender value, if any, of the member’s funds in the pooled CPF Life annuity scheme.

(Download an ebook with a chapter on the CPF at leongszehian.com, or watch a video on the new CPF Life scheme.)