When one reaches the age of 55, the RA will be created. In the absence of a property pledge, the default option is that the CPF Board will transfer an amount equivalent to the prevailing FRS from the SA to the RA to form your retirement sum. This is the case even if you have funds higher than the FRS sitting within your CPF. My opinion is that this default option of doing nothing is a case of leaving some money on the table.
Here are the reasons why:
1. Higher streams of monthly income upon age 65
The main reason why we top up our RA to reach ERS level is to enjoy higher monthly lifelong CPF LIFE payouts when we eventually commence withdrawals upon reaching payout eligibility age. Whether it is a CASH top-up or a CPF transfer, the 4% interest will start compounding and contribute towards as premiums to the CPF LIFE pool.
A common misconception is that one must top up to the applicable ERS level at one go. Well, it is actually possible to top up one’s RA to any amount (as long as it does not exceed ERS) and at any time of the year. Therefore, for those who are saving up to reach ERS, you should immediately top up whatever amount that you have already set aside to allow compound interest to work its magic earlier.
In fact, as the ERS increases annually to catch up with Singapore’s inflation, you can continue to perform annual top-ups as the top-up limits does not take into consideration the interest earned in your RA. For instance, the ERS increased from $271,500 in Yr 2020 to $279,000 in Yr 2021. That allows for an additional $7,500 of top-ups. It is best that you log in online to your CPF account via your Singpass to find out the precise amount that you are eligible to top up to your RA. Go to CPF Online Services –> My Messages to find out more.
2. Quality/credit-worthiness of the additional income
Another commonly overlooked factor is the “quality/credit worthiness” of the additional lifelong income that you are getting from CPF LIFE. It provides a reliable income stream that is less affected by the performance of the economic markets. The alternative would be to take your cash withdrawn from either your bank accounts or OA/SA and purchase investment products that are subject to the vagaries of the markets. The reliability of CPF LIFE should not be underestimated especially when most of us would be dependent on the payouts to finance our retirement expenses.
3. Cash top-up is not part of CPF annual limit
A cash top-up to the RA falls under the Retirement Sum Topping-up Scheme (RSTU). Therefore, it does not form part of the CPF Annual Limit (which is the maximum amount of CPF contributions that can be credited to an individual’s account in a year and currently stands at $37,740.)
However, I must stress that this cash top up is not eligible for tax relief if one’s RA already exceeds the prevailing FRS.
