Leaving behind a Legacy for your Child, via his CPF SA top-up

While CPF SA Shielding and OA Shielding — A Live Example is more applicable to more senior adults who are nearing the age where RA is formed at .age 55, there is a group of people who are believers in giving a kick-start to their children’s CPF retirement planning early by inculcating transferable and manageable savings and investment habit or even leaving behind a legacy through their child’s CPF.

This includes myself, who strongly believes in the power of compounding your child’s SA from young.

Not everyone realise this — All Singapore Citizen newborns automatically have / can create a CPF account. Newborns born on or after 1 January 2015 also qualify for the enhanced $4,000 MediSave Grant for Newborns, which gives a great start in an account that earns 4% interest annually. The first $60,000 of combined balances (with up to $20,000 from the OA) earns an extra 1% interest. This is the most crucial point: Monies in the SA or MA potentially earn 5% on the first combined balances, assuming OA remains zero.

Some people are on the other side of this camp due to the following reasons:

  • Liquidity is one consideration. Monies given towards the child’s CPF account is “locked” till retirement age, in exchange for the higher earning interest rate. Alternative instruments where liquidity are more assured such as equities, saving deposits, endowment plans etc are out there.
  • Policy changes is another risk. This includes the interest rate for OA/SA/MA, increasing FRS amount over the years, as well as age of withdrawal. The policy that is applicable today may not be applicable during their time.

Uncle Jack James is a practitioner in this field. Uncle Jack is 40 this year. He has been pledging about $6,000 annually to his son’s CPF SA account since the birth of his son. As of April this year, Uncle Jack’s son already has a combined $28,095 in his SA/MA account earning a good 5% interest on the first $60,000.

And a further simulation is done for the future on just top-ups and interest earned only. This has not included his son’s further employment contribution (from both employer and employee). We can see a fair good projection of $417,000 at age 55. This is also one of the point I wanted to emphasis — inculcating transferable and manageable savings and investment habit. Some people assume that the top-ups by parents is perpetual, but NO!

Once your child is old enough and financial savvy to understand the benefits of what is going on, sometimes it is also encouraging to look at historical trends and entice him to continue this “forced savings” habits early on in life.

Uncle Jack James is also no stranger in maximising the dollars earned from CPF; he does annual RSTU cash top-up to his SA account, as well as the occasional OA to SA transfer. With this, he has already reached FRS amount early in life, well before his retirement age.

Similarly, another parent Uncle Noel Tan has a similar idea of leaving behind a legacy, via RSTU on his own CPF account, as he believes what he saves up (and not used) in his own account will go towards his children (beneficiaries) eventually.

In the end, there is no right or wrong answers — to each his own strategy. My area of contend or focus is to quickly reach the first $60,000 for my children, which makes the most sense to get the extra 1% interest rate early (if you can afford to). Also as financial savvy adults, after setting aside your retirement saving funds, emergency savings, investment funds or even your children education funds, it absolutely makes sense if you have the means to and no where else to put your extra monies.

One last but additional point to note: Only mandatory and voluntary contributes can be withdrawn in excess of FRS (or BRS amount with property pledge) at age 55. This includes OA to SA transfers. RSTU cash top-ups cannot be withdrawn even if this is in excess of FRS amount.

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