In the CPF, there are three accounts, namely the Ordinary Account (OA), Medisave Account (MA) and the Special Account (SA). Annual interest rates of the OA, MA and SA are 2.5%, 4% and 4% respectively. Today’s post would be focused on the Medisave Account.
Don’t get misled by the title. There really are three accounts, and the Medisave Account isn’t going to be combined with the Special Account anytime soon.
However, I would like to highlight a feature of the Medisave Account which makes it special. In fact, more special than the Special Account if you have not hit your FRS (Full Retirement Sum).
Did you know that the Medisave Account has a ceiling of $52,000 as of today? Ah ha! I bet you didn’t! It is the only account out of the three that has a ceiling. This ceiling is known as the Basic Healthcare Sum (BHS). It increases annually due to inflation and rising healthcare costs. BHS is useful for us to create wealth using the CPF.
Hear this – Once your MA has reached the BHS, the magic happens.
Any excess monies to the MA, be it the mandatory contributions from your employee or the 4% interest earned annually, will be transferred to the SA if you have not hit the FRS. If you have already hit the FRS though, it will be transferred to your OA.
Voluntary contributions will be refunded to you should you want to top up your MA once it reaches the BHS. Yes, this is one of the cases when the CPF doesn’t accept your money. Go use it somewhere else. :p
Well, you might be thinking, “What’s so great about this? Eventually, only moving from one account to another mah.”
Remember that the purpose of the CPF serves as retirement planning for many people in Singapore. Once you hit the age of 55, the monies from your OA and SA will be moved to your Retirement Account (RA). By then, you would be able to withdraw any money that is in excess to the FRS (or BRS with your property pledged).
This means that you can use the mandatory contributions (if you are employed) and interest earned from MA as leverage to allow them to compound in your SA and therefore increase your RA significantly over the years.
If you utilized this feature well, you would have presented yourself with extra liquidity for retirement. And all you really did was to rely on compound interest (and the Singapore Government).
I have made a simple Excel calculator for this. You can get the numbers from this spreadsheet. You can also download a copy for yourself to see the formula behind the cells, and edit it to your own needs. There are two tabs, namely “Without BHS ceiling” and “With BHS ceiling”. Use the two tabs as comparison.
Following are the assumptions:
- I am a fresh graduate aged 25 this year.
- I earn $3000 per month, and with no additional bonuses and pay increment. That amounts to $36,000 annually.
- I will not use any of my CPF monies for other purposes. (e.g. Housing, Investments)
- The FRS increases 3% annually based on the current FRS of $166,000.
- The BHS ceiling increases by 3.5% annually based on the current BHS of $52,000.
- CPF Allocation rates are the same as here.
- I will work until Age 55.
Here are some observations:
1) In both scenarios, I will reach the FRS and the BHS at the same age of 47.
2) After Age 47, my mandatory contributions and the amount of interest that I earn in my MA will be sufficient enough to cover the increase of the BHS ceiling each year.
5) After my 55th birthday, I am able to withdraw $135, 285.73 if there is a BHS ceiling. Without the BHS ceiling, I am only able to withdraw $95, 264.73.
3) Once my SA has reached the FRS, the excess monies of my MA can only be moved to OA instead of SA. This is not ideal because the OA has 1.5% lesser interest. Nevertheless, it provides an additional liquidity of $40,021 even without doing anything to the funds in my CPF account.
4) If there is no such thing as a BHS, then my MA will be accumulated to $184,643.54, which would be almost 30.94% more than the BHS. However, I would not be able to withdraw this amount of money as it can only be used for other medical related purposes.
In reality, most people generally do earn higher than $36,000 annually. This means that they might hit the BHS and FRS at a younger age. There are also other options that you can take to increase the amount in your CPF accounts, such as Voluntary Contributions and moving monies from the OA to the SA to earn higher interest. The calculation also doesn’t account for the 1% additional interest that you can get for the first $60,000 of your accounts combined (with up to $20,000 for your OA).
Now, the idea is this. If you are almost the same age as me, you probably still have a long way to go before you hit the FRS. Use the BHS ceiling of the MA to maximize the funds in your RA. Your goal should be to accumulate as much wealth as you can in the SA to hit the FRS as soon as you can, so that you can allow the compound interest of 4% to work it’s magic, and subsequently use it for your retirement. The component of the additional liquidity is always going to be advantageous to you. How you want to use the money would be another story altogether.
If you are deciding to do a Voluntary Contribution (VC) to the CPF, make the contribution to the MA first. Subsequently, if you have already hit the BHS and you have some spare cash, make a VC-MA at the beginning of every year to hit the new ceiling again. Allow the excess MA monies to grow in other accounts.
I hope that this article was useful for you. Check out my other CPF related posts in the “The CPF System” category. 😉
Thanks for reading!
Miss Niao xoxo