Why I Maximised My SRS Contribution but not CPF SA

Responsible working adults do things like tax planning ahead of time. Naturally, I waited until the absolute last day to do it… the literal last hour, actually, in between drinks at a New Year party last week wondering what to do.

Earlier in the day on New Year’s Eve, I pulled the trigger and transferred the maximum amount I could to my Supplementary Retirement Scheme as the deadline was 7PM that day. Later at night, in between shots of whiskey 15 minutes before 2021, I decided that I was not going to contribute to my CPF Special Account after all.

Why I contributed to SRS

With the current maximum contribution cap of $15,300 a year, SRS can provide tax relief for a bit of money, and still provides flexibility of withdrawals should I need it in future.

I think it fits with my plan to FIRE when I’m in my mid-forties – 5% penalty in 10-15 years’ isn’t too bad if you are saving more than 5% of tax right now.

Why I considered the RSTU Scheme

Under the Retirement Sum Topping-Up Scheme (RSTU), I can top up up to $7,000 of cash into my CPF SA for tax relief which is pretty similar to SRS. There are some pros to this:

Special Account’s interest
At 4% p.a, the CPF SA provides decent rate of return for very little fuss and risk.

Withdrawal at 55 for funds above FRS
While CPF is notorious for locking up savings beyond age 55, you can indeed withdraw amounts above the Full Retirement Sum (FRS). As someone in my thirties, 55 suddenly doesn’t seem that far off after all. Given faithful and voluntary contribution to one’s CPF on top of mandatory contributions, hitting FRS is almost a certainty at age 55.

Why I decided against topping up SA

And here are the reasons why I decided against it:

Potential changes to CPF
CPF is also infamous for shifting its goalposts, and what extent you believe it’d change in future highly depends on your political views. Personally, I don’t think draw-down ages and the main features would deviate too drastically from the current system when I retire, but I can’t possibly make any guarantees about that.

Even its interest rates are non-guaranteed, and CPF publishes the rate every 3 months. If I were a betting man, I’d wager that this rate wouldn’t be touched for a long long time, but even then I’d hesitate on specifying the timeline of this gamble. They could possibly lose a GRC or two should they lower the interest rate, but there really isn’t any guarantee of it not happening, and the fact that CPF publishes the rate quarterly instead of annually doesn’t exactly inspire confidence. Surely CPF could guarantee the rate for this year at least?

How much would my FRS be?
Currently in year 2021, the FRS is $186,000, and that amount will increase about 3% each year. Historically, the FRS has also grown by as much as almost 5% p.a. The limited visibility of what the FRS will be like when I turn makes planning more difficult.

Moreover, unlike most who start contributing to CPF in their mid twenties when they first start working, I spent a good deal of my working life as a self-employed person, and never contributed to my SA until a few years ago. I feel that I would trailing the FRS and wouldn’t be able to withdraw any amount at age 55 even with diligent top-ups. This makes me more partial to reserving cash for my FIRE goals.

Reluctance to invest SA funds
SA’s low-risk 4% p.a. returns also means that funds that I park in this account would unlikely be invested. This is the double edged sword of a high yield account like this: it’s not high enough to replace investing, but it is high enough to deter one from investing. In contrast, contributing to SRS forces me to take action on those funds, or they’d languish at 0.05% p.a. interest.

I was pretty tipsy by midnight
More a result of my procrastination to the literal last hour, by now I was several glasses into New Year drinks, and probably not the best state of mind to do a PayNow to CPF. Not the best of reasons… but it’s mine 🤷🏻‍♂️

What about you?

As I age and my income grows, reducing my tax obligation and saving for the future have become increasingly relevant and interesting topics to me, and I would love to hear other views and opinions. What is your tax avoidance and retirement strategies like? See you in the comments or my Telegram channel!

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