Most developed countries in the world have their own version of a pension scheme. This is to ensure that retirees continue to receive a basic level of income support in their old age when they are no longer working.
While some countries have welfare schemes to provide for this income, Singapore uses the CPF Lifelong Income For The Elderly (CPF LIFE). CPF LIFE is an annuity plan that provides Singapore Citizens and Permanent Residents (PRs) with a monthly payout from age 65, for as long as they live.
Payout from CPF LIFE is based on how much individuals have in their Retirement Account (RA). The more you have in your RA, the higher you can expect your monthly payout to be.
That said, how much you receive from CPF LIFE is also based on some other factors.
To increase CPF LIFE monthly payout, CPF members can choose to defer the start of their payout. For each year that they defer after reaching 65, they can increase their monthly payout by about 7%. For example, a monthly payout of $750 to $800 at age 65 will increase to $990 to $1,070 by age 70.
The other factor that determines how much you receive each month is the CPF LIFE plan that you select. Today, there are two CPF LIFE plans that members can choose from. They are the Standard Plan and the Basic Plan. A third plan, the CPF LIFE Escalating Plan, will be available from January 2018.
What’s The Difference Between The CPF LIFE Standard Plan & Basic Plan?
A simple way of understanding the two plans is to look at how CPF illustrates the differences. The infographics below (which include the CPF LIFE Escalating Plan) is extracted from the CPF website.
The Standard Plan, which is the default plan, provides a higher level of monthly payout while leaving a lower bequest. The Basic Plan gives a lower monthly payout but leaves a higher bequest.
One way to choose between the two plans is to ask yourself whether you prefer to have a higher monthly payout, or whether you prefer taking less each month, in order to leave a larger legacy for your loved ones.
However, this method of choosing between the two plans can be a little simplistic, at least in our opinion. We believe Singaporeans can make a more informed decision if they analyse and understand the two plans better.
The Benefit Illustration
Think of the two plans as separate annuity products that you are considering.
CPF LIFE Standard Plan
At age 55, you set aside the Full Retirement Sum of $166,000 in your Retirement Account. From age 65 onwards, you will receive $1,301 to $1,435 each month, depending on your gender. If you pass on at 75, your bequest will be $80,272 to $85,624. If you pass on at 85 or later, there will be no bequest.
The table below is another way of interpreting the benefit illustration. For the calculation, we took the higher range that is applicable for male. This assumes that CPF member set aside the Full Retirement Sum of $166,000 at age 55.
Age Member Passes OnTotal Monthly Payout ReceivedBequest ReceivedTotal Amount Received75$172,200$85,624$257,82485$344,400$0$344,40095$516,600$0$516,600
The simple observation here is that the longer you live, the more you gain financially from CPF LIFE. This makes sense, since there is a commitment to pay CPF member a monthly payout as long as they live.
CPF LIFE Basic Plan
At age 55, you set aside the Full Retirement Sum of $166,000 in your Retirement Account. From age 65 onwards, you will receive $1,185 to $1,309 each month. If you pass on at 75, your bequest will be $182,895 to $194,084. If you pass on at 85, your bequest will be $96,900 to $104,587. If you pass on at 95 or later, there will be no bequest.
Here is a table depicting the benefit illustration for male. This assumes that CPF members set aside the Full Retirement Sum of $166,000 at age 55.
Age Member Passes OnTotal Monthly Payout ReceivedBequest ReceivedTotal Amount Received75$157,080$194,084$351,16485$314,160$104,587$418,74795$471,240$0$471,240
Once again, the longer you live, the better off you will be.
However when compared to the Standard plan, the difference between the total amount received for someone who passes on at 85 and 95 isn’t as high at just $52,000. That’s because the Basic plan gives a high bequest amount at both age 85 ($104,587) and 75 ($194,084) compared to the Standard plan.
In contrast, the Standard plan only gives a bequest of $85,624 at age 75, and nothing at age 85.
If you are fortunate enough to live till 95, then the Standard plan will give a higher total payout ($516,600) compared to the Basic plan ($471,240).
Life Expectancy Matters
Given that our tables above show that individuals who live a longer life (i.e. 95 and above) should opt for the Standard plan while those who are not as confident of living till their 90s should opt for the Basic plan, the question now turns to which plan should Singaporeans choose from.
Life expectancy rate in Singapore is 82.6. However that’s a life expectancy rate at birth, which while useful, isn’t the most accurate to be based on for our situation.
CPF members who are choosing their CPF LIFE plan will be 65 years old. At that age, the average life expectancy for adults is 20.8 years. This also means about 1 in 2 adults who reaches age 65 will also reach age 85. You can check this out in the Singstat website.
Since about 50% of CPF members who are 65 will reach age 85, the total amount received at age 85 becomes a number of interests for us to consider. If a member were to pass on at exactly age 85, he and his loved ones will receive more under the CPF Basic plan.
Here’s a look once again the numbers based on meeting the Full Retirement Sum of $166,000 at age 55.
Total Monthly Payout Received At Age 85BequestTotal AmountStandard Plan$344,400$0$344,400Basic Plan$314,160$104,587$418,747Difference$30,240($104,587)($74,347)
Based on this approach of assuming a person passes on at age 85, the CPF Basic plan appears to be the superior plan as it pays out more in total.
Of course, we cannot say for certain that the CPF Basic plan is better.
As shown above in the article, if a person were to know that he will live till age 95, then the CPF Standard plan will be better, since passing on at age 95 means having no bequest, regardless of which plan they choose from. Thus it would be better to just get as much as possible each month.
By the same token, if a person were to pass on earlier, say at age 75 or before, then the Basic plan is superior.
Of course, there is no way of knowing all these things in advance.
Do you agree with our analysis? What are your thoughts between choosing the CPF LIFE Standard plan or the Basic plan? Discuss it with us on our Facebook Page.
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