CPF Shielding Hacks (Special Account & Ordinary Account): Do they really make sense?

Today, many more people in Singapore are becoming aware of their CPF accounts and interested to find out how to optimise their funds in there – which can be a substantial sum. One increasingly popular trend is the CPF Shield Hack.

What is the CPF Shielding Hack?

When we turn 55, a new Retirement Account (RA) is created for us. Up to our Full Retirement Sum will be transferred from our Special Account and Ordinary Account into the Retirement Account.

The first pool of monies to flow into our Retirement Account will be from our Special Account. This is because the balances in our Special Account has always been set aside for our retirement purposes.  If we are unable to hit the FRS, then our Ordinary Account balances will flow in to plug the gap.

If we do not want our CPF SA balances, or even our OA balances, to be transferred into the Retirement Account, we can use the CPF Shielding Hack to “shield” these balances.

The Special Account Shielding Hack

The problem some people have with the way our Retirement Account is filled up is that our Special Account balances, which earn 4.0 per cent per annum, flows into it first. Meanwhile, our Ordinary Account (OA) balances, earning 2.5 per cent per annum, is only transferred in after that.

Because of this, some people may prefer our OA funds to flow into our Retirement Account first and to shield our Special Account balances which already earns 4.0 per cent. This way, we optimise the amount of interest we earn on our CPF balances.

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Unfortunately, we also cannot simply transfer our Ordinary Account balances to our Special Account after the age of 55 – we can only do this before we turn 55.

This is the primary reason why the Special Account Shielding Hack exists.

To shield our Special Account balances, we typically have to correctly time an investment into a low-cost and liquid fund offered on the CPF Investment Scheme (CPFIS).

Remember, we’re only trying to shield the amount, not trying to beat the 4.0 per cent interest on our Special Account.

After our 55th birthday, we’re going to divest it and see the entire amount flow back into our Special Account.

When doing so, we can only invest anything beyond $40,000 in our Special Account – which means at least $40,000 of our Special Account balances will be transferred into our Retirement Account.

With the rest of our Special Account balances out of the way, our Ordinary Account balances will flow into the Retirement Account.

The Ordinary Account Shielding Hack

If we choose to, we may also shield our Ordinary Account balances.

This way, we get to keep our Ordinary Account balances outside of the CPF LIFE scheme. We retain greater flexibility with our Ordinary Account balances, being able to pay for a property purchase or to invest.

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In addition, we also get to make additional top-ups to our Retirement Account to earn yearly tax relief doing so.

To shield our Ordinary Account balances, we also have to correctly time an investment into a low-cost and liquid fund offered on the CPF Investment Scheme (CPFIS). Unlike our Special Account, we can only invest anything above the first $20,000 of our Ordinary Account  balances.

By utilising both the Special Account and Ordinary Account Shielding Hack, a total of $60,000 ($40,000 from our Special Account and $20,000 from our Ordinary Account) will still be transferred into our Retirement Account.

Stop Ordinary Account balances from going into Retirement Account

If we still have a home loan to service, we will need to start paying for it in cash if our entire Ordinary Account is transferred into our Retirement Account.

It’s not a shielding hack, but we can simply apply directly to CPF to stop our Ordinary Account balances from being transferred into our Retirement Account if we still need it to service a home loan.

We just need to log in to the CPF website to apply to reserve our Ordinary Account balances before our 55th birthday.

Does it make sense to do the CPF Special Account Shielding Hack?

Since the Special Account and Retirement Account pay the same base interest rate, but the Ordinary Account pays less, it makes sense to see our Ordinary Account balances get transferred into our Retirement Account instead.

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Due to this reason, this hack makes most sense only if we have a large Ordinary Account balance we rather see flow into the Retirement Account compared to our Special Account balances.

In addition, we must also like the CPF scheme such that we want to keep our excess funds in it rather than withdrawing.

For example, anyone turning 55 in 2021 has to set aside the Full Retirement Sum $186,000 in 2021.

If the person has $200,000 in their Ordinary Account and $100,000 in their Special Account, by employing the Special Account Shielding Hack, he or she allows their Ordinary Account balances to fund the entire Full Retirement Sum (FRS), apart from the $40,000 they have to leave in their Special Account.

This way, they would have $54,000 in their Ordinary Account and $60,000 in their Special Account, and $186,000 in their Retirement Account.

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Without the Special Account Shielding Hack, they would have $114,000 in their Ordinary Account, $0 in their Special Account, and $186,000 in their Retirement Account. This earns much lower interest returns compared to using the Special Account shielding hack.

Remember, the hack allows the person to earn the most interest return on their balances. Of course, we don’t even need to consider this hack if we wanted to withdraw anything above the FRS. In both situations, we can withdraw $114,000 from CPF.

One simple solution we can consider if we want to achieve a similar outcome is simply to transfer our entire Ordinary Account balances (up to the Full Retirement Sum) to our Special Account before we turn 55. Doing so may even lead to a more optimal transfer of our Ordinary Account to Retirement Account at 55, while keeping more in our Special Account.

Does it make sense to do Ordinary Account Shielding Hack?

If we want to shield our Ordinary Account, we first have to already be willing to do the Special Account shielding hack.

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By employing both shielding hacks, we will still see a minimum of $60,000 flow into our Retirement Account – $40,000 from our Special Account and $20,000 from our Ordinary Account as we cannot invest these minimum amounts.

Unlike shielding our Special Account balances, by shielding our Ordinary Account balances, we are earning lower interest returns compared to the Retirement Account. This means we must prefer the flexibility of using our Ordinary Account or dislike being on the CPF LIFE scheme.

Since we do not meet the Full Retirement Sum (or Basic Retirement Sum with property pledge), we cannot withdraw our excess CPF monies even if we technically have more than the $186,000 across our Retirement Account, Special Account and Ordinary Account.

In terms of flexibility, we are able to use our Ordinary Account balances to purchase a property, pay for mortgage loans, and if we want to invest to potentially earn a higher return.

Timing is important when doing CPF Shielding Hack

If we are trying to shield our CPF Special Account or Ordinary Account, timing is going to be important. We need to invest these funds before we turn 55, and we should try to time it such as it is divested right after we turn 55.

This is because we will not be earning any interest for the duration that our money is outside the CPF system. It can be a very substantial amount that we lose out if we don’t time it properly. It can also be a very costly mistake if we invest in the wrong investment – it needs to be very safe and very liquid.

If we try to do this a few days before we turn 55, we may end up being too late and see our CPF Special Account, or Ordinary Account, balances not invested in time.

This article was first published in Dollars and Sense. All content is displayed for general information purposes only and does not constitute professional financial advice.