Class of 2020, I feel you. 2020 has been a year like no other.
The COVID-19 outbreak has robbed you of the chance to formally say goodbye to your lecturers and coursemates, taken away your graduations and replaced them with social distancing and uncertainty in the job market.
Under the current economic climate where unemployment rates are rising and people are getting laid off — it is clear that the demand for jobs the supply. To say that searching for a job is challenging would be an understatement.
Undoubtedly, opportunities will be hard to come by. But if you are fortunate enough to have acquired a traineeship position under the SGUnited Traineeships Programme — congratulations!
However, I understand that this situation is not ideal, as trainees will only be offered an estimated monthly training allowance from $1,100 to $2,500 depending on your educational qualifications. Unfortunately, this allowance does not come with any Central Provident Fund (CPF) contributions.
Thus, you might be thinking.
Should I still make voluntary contributions to my CPF?
Here is what you need to consider!
TL;DR: SGUnited Trainees: Should You Contribute to CPF?
- CPF offers safe and decent returns that are generally higher than banks.
- CPF can still be used for housing, retirement and medical needs. Can even be invested.
- CPF is safe from debtors.
- CPF money can only be withdrawn at 55 years old.
- Excessive voluntary CPF contributions can affect your cash flow.
Basically, there’s no fixed rule here so it really depends on your financial situation.
If you plan it right, your CPF could be a viable component of your retirement portfolio and serve your housing and healthcare needs.
SG United Traineeship Benefits
Before we begin, let’s establish some background about SGUnited Traineeships Programme and the benefits that SG United Trainees are afforded.
The 12-month long programme aims to assist fresh graduates by allowing graduates to build up relevant skills, knowledge and network, in preparation for their next career phase.
Unfortunately, the main benefit that is mandatory is the estimated monthly training allowance.
SG United Traineeship Allowance
|Required qualifications or|
|University degree or|
|Polytechnic diploma or|
|ITE or equivalent|
|$1,800 - $2,500||$1,300 - $1,800||$1,100 - $1,500|
Source: SGUnited | Ministry of Manpower (MOM) | Workforce Singapore
*The estimated monthly training allowance for each qualification is pegged to 50-70% of median starting salaries. In addition, they are based on the required qualifications, as well as the scope of traineeship and skills required.
As there is no employer-employee relationship, there are some important points to note:
- Host companies are not obliged to offer employee benefits. However, benefits can be offered on a discretionary goodwill basis.
- CPF contributions will not be given by the host companies.
- You are not required to pay any tax on the trainee allowance.
- They are not considered self-employed so there are no CPF contribution requirements. Any CPF Voluntary contributions (VC) will be made as a non-self-employed person.
CPF Voluntary Contributions For Non-Self-Employed Person
Although it is not compulsory, you can make Voluntary contributions to all three of your CPF accounts:
- CPF Ordinary Account (OA)
- CPF Special Account (SA)
- CPF Medisave Account (MA)
But, the amount of VC you can contribute is capped at the current CPF Annual limit of $37,740.
Do note that for a non-self-employed person, only Voluntary contribution to MediSave Account is tax-deductible.
Now that you’ve gained a better understanding of this, let’s move on up to why you should or should not contribute to CPF.
CPF Offers Safe and Decent Returns That Are Generally Higher Than Banks
With our current low-interest rate climate, the base interest rates for high-interest rates savings accounts have fallen to about 0.73% on average.
Singapore’s Ministry of Finance has publicly stated that CPF monies are safe:
“Yes, your CPF monies are safe as all CPF monies are invested in securities (SSGS7) that are issued and guaranteed by the Singapore Government. The full resources of the Government back this guarantee that CPF monies will be paid back. As the Singapore Government is one of the few remaining triple-A credit-rated governments in the world, this is a solid guarantee.”
According to Moody’s, Singapore’s credit rating stands at AAA-stable (read: the top credit rating achievable).
However, CPF interest rates have remained resilient.
CPF Interest Rates 2020
|CPF Account||Current Rate (p.a.)|
|Ordinary Account||2.5% (up to 3.5%)|
|Special Account||4.0% (up to 5%)|
I would assume that you are under 55 years old since you are an SGUnited trainee.
For those under 55, the Government gives out bonus interest on the first $60,000 of your combined balances in your OA, SA and MA.
However, there is a cap of $20,000 for the OA.
Another thing to consider is this. By placing money into your CPF account sooner rather than later will earn you compound interest.
To illustrate this, we will use the example of Pistachio, who like many graduates has just gotten her traineeship lasting 12 months.
Pistachio’s Profile and Assumptions
- Under 35 years of age
- Monthly traineeship allowance of $2.500
- Will contribute 20% of her allowance to CPF each month ($500)
- Has less than $60,000 in her CPF account.
- Will stay at traineeship for a year.
Pistachio’s CPF Gains After One Year
OA: ($310.85 x 12)$3,730.2 x 3.5% = $130.55
SA: ($81.05 x 12)$972.60 x 5% = $48.63
MA: ($108.10 x 12)$1,297.2 x 5% = $64.85
Pistachio’s Total CPF Gain After One Year
$130.55 + $48.63 + $64.85 = $244.03
Do note that CPF calculates the interest rate monthly but credits the interest rate at the end of the year.
This is the first step. When you place your money into your CPF for longer, you will benefit from compound interest.
P.S. Check out our article about compound interest for the math behind this.
So much so that there is even a 1M65 movement, which teaches you how to get $1 Million at 65 using your CPF based on the same concept of compound interest.
CPF Funds Can Still Be Used for Your Retirement, Housing and Healthcare Needs
Last I checked, whether you are employed, self-employed or under a traineeship, most of us have similar retirement, housing and healthcare needs.
You might want to retire comfortably, buy a house or use Medisave for your healthcare-related expenses.
If managed well, CPF is an effective tool to fulfil these needs.
From this viewpoint, it makes sense for you to make Voluntary contributions into your own CPF account where you can get some tax relief as well as enjoy the higher interest rates.
The best part? You are in control of the amount to contribute.
CPF is Safe From Debtors
Life is unpredictable.
According to the Ministry of Law’s bankruptcy statistics from Jan 2020 – Jun 2020, there were:
- 1,711 applications for bankruptcy
- 514 bankruptcy orders made
- 962 bankruptcy discharges.
If you are looking to start a business in the future or take-up financial risk, putting money in your CPF can safeguard your retirement funds.
This is so as any funds you have in your CPF cannot be touched by creditors or even the Official Assignee, even if you are sued for millions.
Also, you will still be able to withdraw your CPF at 55 as an undischarged bankrupt or on medical grounds.
CPF Money Can Only be Withdrawn at 55 Years Old
The main drawback of CPF is that it is not very liquid.
CPF Withdrawal Age And Amount
That’s right, you can only start withdrawing your CPF monies when you are 55 years old.
But wait, it’s NOT ALL OF IT.
You are only able to withdraw:
- Your remaining Ordinary and Special Accounts savings after setting aside your Full Retirement Sum (FRS)
- $5,000 if you cannot hit the FRS.
|Balance in OA & SA at 55||Amount which you can withdraw at 55|
|$5,000 or less||All your Ordinary and Special Account savings|
|Between $5,000 and your Full Retirement Sum||$5,000|
|More than your Retirement Sum||$5,000
Ordinary and Special Account savings after setting aside your Full Retirement Sum
*whichever is higher
At the time of writing, the FRS for members is $181,000.
The FRS will be slowly dispensed to you via whichever CPF LIFE scheme you choose. So that means that the money you have locked in your CPF is purely for your retirement.
In addition, any amount you deposit in your MA cannot be reversed and taken out. You will only be able to use it for healthcare.
Which brings me to my next point.
Excessive Voluntary CPF Contributions Can Affect Your Cash Flow
Im sure you already know this but here’s a quick reminder: voluntary contributions and top-ups are irreversible.
In other words, there is no turning back once you’ve done it. Even if you need the money unexpectedly.
Before contributing to your CPF accounts, ensure that the money you are putting in will not be needed for the short-term or mid-term.
You will also need to set aside money for unexpected emergencies with an emergency fund enough to cover at least 3 to 6 months of your monthly expenses.
Any extra cash that you have can then considered to be put into buffing up your CPF accounts.
This concept of the emergency fund is covered in the Seedly Money Framework:
This framework was specially created to help non-financially trained Singaporeans start their personal finance journey on the right track.
It was distilled after many hours of poring through complicated money concepts and moderating the questions and answers on SeedlyCommunity!