What will you do with your 13th month bonus that your future self will thank you for?

We’re nearing the end of the year, and in addition to holiday celebrations and get-togethers, many of us also look forward to the AWS (a.k.a. 13th month bonus). As an American, the AWS still surprises me, as it is a business practice that is specific only to this region. Though it is not required that a company pay AWS, many people count on it and will even earmark the spending of it, instead of treating it as a discretionary bonus that varies depending on company earnings and economic conditions. If you don’t depend on the AWS to make ends meet, and you already have a sufficient emergency fund and are debt-free (with the exception of a mortgage), here are some suggestions on how to invest your AWS: 1. Top up your CPF Retirement Account under the Retirement Sum Topping-Up Scheme (RSTU). Under this scheme, you can make cash contributions to build your own CPF Special Account (for members below age 55) or Retirement Account (for members age 55 and above) or the SAs/RAs of your loved ones.

Benefits: • Money in these accounts can earn up to 6% in interest per year (more than 40 times the average bank saving deposit interest rate, according to MAS. Currently, the OA earns a guaranteed interest rate of 2.5% per year, while savings in the SA and MA earn a guaranteed interest rate of 4% per year. The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your OA, earns an additional 1% interest per year. On top of that, an additional extra interest of 1% per year will be given on the first $30,000 of your CPF balances for members aged 55 and above (effective 1 Jan, 2016).CPF interest rateCPF interest rate2compound growth

• You also can claim tax relief of up to $14,000 per year by topping up with cash (up to $7000 of tax relief for topping up your own account, plus up to $7000 of tax relief for top-ups for loved ones).

Considerations: • As with all CPF schemes, there are rules and limits that apply. Currently, you can only top up to the meet the current Full Retirement Sum (FRS), but starting next year (1 Jan, 2016), you will be able to top up to the Enhanced Retirement Sum for higher monthly payouts.

  2. Make a Voluntary Contribution to your CPF. You can make a Voluntary Contribution to your CPF account up to the Annual Limit ($31,450 for 2015), which is the maximum amount of mandatory and voluntary contributions to all 3 CPF accounts in a given calendar year.

Benefits: • Money in these accounts can earn up to 6% in interest per year (as mentioned above). • You may be able to claim tax relief by contributing to your MA under the Additional Medisave Contribution Scheme (AMCS). The amount of tax relief is calculated based on the Annual CPF contribution cap. Please see here for examples.

  3. Contribute to a Supplementary Retirement Scheme (SRS). Operated by the private sector, the SRS complements CPF and does not require regular contributions.

Benefits: • Contributions to the scheme are tax deductible, subject to an annual contribution cap. • Interest is earned tax-free. • When you’re ready to withdraw, only 50% of your withdraws are subject to tax (provided that withdraws are made at retirement age or for qualified medical purposes for Singaporeans/PRs). • The withdrawals can be spread over a maximum of 10 years to further reduce tax burden.

Summary of Schemes

4. Consider the following optimisation & maximization strategies:

• By transferring your excess OA savings to your SA (for those under age 55) or RA (for age 55 and above), you can earn interest of at least 4% per year (instead of the 2.5% that your OA currently earns). However, once this election is made, it cannot be reversed so you must take the necessary time and think twice before considering this option. • Think twice before you use your Medisave Account (MA) to pay for eligible medical expenses. Most of us will have significantly more health-related expenditures towards the end of our life. If you’re still in good health and still quite a few years away from retirement, you may be better off using cash to pay for current medical expenses, since leaving money in your MA allows it to grow at 4% per year, and you will be better equipped to handle your future healthcare needs as you age. • Think twice before using your OA savings to invest in a CPF Investment Scheme (CPFIS). According to a recent Straits Times article, most people fair better leaving their money in CPF rather than investing it through a CPFIS. Let me emphasise that point again: for the vast majority of people, leaving their money untouched in their CPF accounts will result in higher returns and in more money at retirement than using that money to independently invest in shares, fixed deposits, unit trusts or other financial instruments through the CPF Investment Scheme. This was a finding based on the sales data from over 900,000 investors. With that said, you’ll always hear stories about someone out there who did extremely well investing through CPFIS, but a one-time anecdotal account should not be applied to the general public as a whole. The fact of the matter is that most people are just average investors with average knowledge and experience; to think that an ordinary person is far superior in investing than the masses is a very optimistic “Pollyanna” outlook.


The Easiest No-brainer Thing to Do The CPF rules can be confusing and the CPF website is just too overloaded with information. Limits and sums are constantly adjusted, so it’s easy to lose track of and be confused about the numbers. The easiest thing to do is to book an appointment and visit a CPF Service Centre. There, the CPF executives will tell you firsthand what your options are, how much you can contribute and to which accounts, as well as what tax reliefs are available to you. They will also help you fill out any necessary forms. Their appointment system is quite efficient, as they try to see you within 15 minutes of your appointment time. In my opinion, it’s well worth the time… and there’s no better time to visit them than during the final weeks of the year when you still have a chance to make some decisions that have tax and income implications. 

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