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CPF – F1 or F9 : Credit extension, mortgages and ordinary/special accounts

This is the last in the series of articles on the CPF by Leong Sze Hian.

Owe money - no need to pay?

Singaporeans may like to know that in a media statement on Dec 3, 2006, the CPF Board said that 'under the CPF Act, all CPF monies withdrawn by a member are protected from any debt or claim.

'Thus, the monies withdrawn are protected from creditors even if the debts are incurred after the CPF withdrawal date.'

What this may mean is that retirees - after withdrawing their CPF at age 55 - may buy whatever they want on credit, borrow any amount of money and become entrepreneurs to do business, because CPF monies withdrawn are 'protected from creditors even if the debts are incurred after the CPF withdrawal date'.

Will financial institutions, retailers, suppliers, etc, become more wary in extending credit, and maybe start to discriminate against people who have withdrawn their CPF?

When someone wants to borrow money from you, you may like to check his or her IC to see if the borrower is over 55 years old, because as a creditor, you will not be able to seek any legal recourse in respect of CPF monies withdrawn years ago.

Singaporeans are now assured of the absolute safety of their CPF.

By the way, will a deceased's estate containing CPF monies withdrawn be protected from creditors of debts incurred after withdrawal, when he dies too?

Lose HDB flat, lose CPF?

Bank loans to HDB buyers has hit $11.5b. As of October 31, 2005, some 65,000 occupants of HDB flats have taken bank loans. The figure represents 12 per cent of people with mortgages on HDB property.

Those with HDB concessionary loans also risk losing their flats if they are unable to service the mortgage, because the outstanding HDB loan has to be paid first, before any balance sale proceeds can be returned to the flat owners' CPF accounts.

This means that there are about 542,000 (88 per cent of HDB flats) HDB borrowers with HDB loans. Against such a backdrop, the number of people who risk losing their CPF if they are unable to service their HDB loans is large, and this may affect almost one in two homes in Singapore.

Why do Ordinary and Special accounts pay different rates?

The transfer of one's CPF from OA to SA is irrevocable. The OA can be used to pay for housing and children's tertiary-education tuition fees, whereas the SA cannot be used.

It is therefore not an easy decision for CPF members to make, because in trying to have more money for retirement by transferring from OA to SA, one will be taking a risk because there may be a need in the future for such funds to pay for housing or education.

Which is the bigger problem? Having less money when one retires or not being able to use it when you need it most? How does one decide when and how much of one's OA to transfer?

Why not allow a case-by-case waiver of the irrevocability of transfers based on financial hardship in the future?

As the HDB concessionary loan rate is only 2.6 per cent, does it mean that we should try to transfer as much of our OA as possible to SA to earn 4 per cent, as long as we think that we can continue to service our housing loan from CPF contributions or with cash?

Does this also mean that we should transfer as much of our OA as possible, before we purchase an HDB flat, so that we can borrow as much as possible at 2.6 per cent and earn the differential?

What is the average rate of return that the CPF Board has been getting on all the CPF funds over the years?

Why does the OA pay 2.5 per cent and the SA, 4 per cent?

If the board's average rate of return is, say, 3.6 per cent, why not pay 3.5 per cent on both the OA and SA?

This would eliminate the dilemma of many members as to whether to transfer their OA. Would the total payout to Singaporeans be more or less if the same rate is applied to both accounts?
It may be of interest to members to know what is the percentage of members who have ever transferred part of their OA to SA, and the percentage of total OA funds that have been transferred.

This will indicate how receptive Singaporeans have been to this transfer policy to 'speed up the accumulation of retirement savings'.

For more of Sze Hian's writings, please visit his website here.