This only affects people who will experience an increase in annual contribution to CPF.
Trade-off
The "cost" of this $2000 increase would mean that
employees would have to contribute $400 X 12 = $4,800.
But the first gain would be the 17% employer contribution that
wasn’t received in the past.
This amounts to $340 X 12 = $4,080.
By giving up $4800 and I
get an additional $4,080 a month. That’s like an 85% return and brings the
total contribution to an auspicious $8880 (HUAT AH)
To sweeten the deal, the money contributed would earn interest and snowball through the effects of compounding.
This would be way more powerful than just having $4,800 in cash.
What’s more
When the total contribution to CPF increases, we can’t
forget our good friend IRAS.
Employee’s CPF contribution is eligible for CPF relief.
This would mean that the assessable income for the year would
reduce by $4800.
Referring to IRAS’s website:
Assuming that the monthly salary is $8,000 with no bonus, the assessable income for the year would be $96,000. The income tax rate would be 11.5% and will result in savings of $552.
However, if your existing reliefs are more than $16,000, then the additional offset will apply to the 7% tax rate. This would in turn lead to a savings of $336.
From a return perspective, the earlier return of 85% increased to 96.5%
(@11.5%) or 92% (@7%).
Now, that’s a pleasant surprise…
What's next?
I’ll continue with my RSTU strategy until I hit FRS.
On top of that, I would also manually transfer the additional amount contributed to CPF OA over to CPF SA to speed up the process to hit FRS.
Other Impacts
This essentially only affects people who are looking at
using CPF’s RSTU
to fund the CPF SA to achieve a Full Retirement Sum (FRS).
In the last article, the number “$37,740”
kept appearing in the later analysis. That really caught my attention.
When the salary contribution limit hits $8,000 a month, the total
yearly contribution becomes $35,520.
Given that the annual contribution limit is $37,740, the remaining
allowable contribution is $2,220.
This would be achieved with a bonus of $6000.
Well, I’m not sure if employers are going to reduce bonus
post this change, but topping up $8000 to my SA might no longer be an option.
It also makes no sense to front-run my CPF contribution. If I really
want to, all I need to do is move the money from OA to SA. This transferred amount will not be included in the “reserved sum”, which is a better alternative
than RSTU.
Ok, so what?
Well, it depends…
If it’s about tax rebates – I’ll most likely need to
graduate from CPF’s RSTU and start topping-up SRS
If it’s about hitting FRS with my own contribution and
letting the salary contribution limit break.
It might be worth considering topping up via OA earlier, especially if I’m not far from
FRS.
That said, doing nothing is also perfectly fine.
This is
because instead of topping up $8,000, this contributes $880 more with only a $4,800 outlay.
The only step I need to do is to manually transfer the difference from OA to SA.
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