CPF Special Account (SA) Shielding

The Central Provident Fund (CPF) is an essential component of retirement planning for Singaporeans. One strategy to enhance your CPF savings is CPF Special Account (SA) shielding. I believe that this tactic can help you maximise your retirement savings, especially as you approach the age of 55.

This process involves transferring your SA funds temporarily to another investment vehicle, such as Treasury Bills (T-Bills) or unit trusts. This prevents your SA funds from being moved to your Retirement Account (RA), allowing you to earn higher interest rates.

I have created this guide which will guide you through the process of CPF SA shielding, as well as introduce you to the benefits, risks, and investment opportunities that are available.

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How Your CPF Retirement Account is Formed

When you turn 55, an RA is created from the savings in your Ordinary Account (OA) and SA. The RA funds are used to provide monthly payments during retirement. If you would like to learn more about your CPF Retirement Account, read our article on the updated CPF interest rates across your CPF accounts.

What is CPF SA Shielding?

It is a unique strategy to protect your SA savings from being moved to your RA when you turn 55. This strategy allows you to continue earning higher interest rates on your savings offered by the SA.

When you turn 55, the CPF Board helps you to set up an RA by moving funds from both your OA and SA. However, by temporarily moving your SA funds into low-risk investments before your 55th birthday, you can reduce the balance in your SA, minimising the amount transferred to the RA. After the RA is created, you can redeem these investments and transfer the funds back to your SA, ensuring they continue to grow at a higher interest rate. Here is a comparison of the interest rate returns that you would generate from each of these accounts as of June 2024:

The current RA interest rate is slightly lower than the SA rate. By shielding your SA funds, you can maintain a higher interest rate for your savings. T-Bills and Unit Trusts, while low-risk, typically offer lower returns compared to the SA interest rate, which makes the SA a more attractive option for growing your retirement savings.

The Special Account Shielding Hack

I have prepared a step-by-step guide to implementing the CPF SA shielding hack below:

1. Evaluate your current SA balance: Begin by checking your CPF SA balance to determine the amount you need to shield. This assessment helps you plan the exact amount to transfer into low-risk investments.
2. Choose a low-risk investment: Select a suitable investment vehicle to temporarily park your SA funds. Options include Treasury Bills (T-Bills), which are short-term government securities, and unit trusts, which offer a diversified investment portfolio.
3. Invest your SA funds: Proceed to transfer the chosen amount from your SA into the selected low-risk investment vehicle. This move reduces your SA balance temporarily, preventing those funds from being transferred to your RA.
4. Turn 55: On your 55th birthday, the CPF Board will create your Retirement Account (RA) using the remaining balances in your Ordinary Account (OA) and SA. The reduced SA balance means less money is transferred to the RA, retaining more funds in the SA.
5. Redeem your investment: After the RA is established, redeem the investments you made earlier and transfer the funds back into your SA. This step restores your SA balance, allowing you to continue earning higher interest rates on these savings.

This strategy ensures that a significant portion of your CPF savings remains in your SA, benefiting from the higher interest rates compared to the RA. Through carefully planning and executing these steps, you can optimise the growth of your retirement savings and enhance your financial security in your retirement years.

Where Should You Put Your CPF SA Money in the Interim?

When implementing CPF shielding, you should choose the right investment vehicle for your SA funds. Here are some options that I recommend:

* Source: https://www.mas.gov.sg/bonds-and-bills/singapore-government-t-bills-information-for-individuals

**Investing with Kilde: For accredited investors, Kilde offers an attractive option as an alternative investment platform. Kilde provides private bonds secured by collateral, with an average net return of 12.2% and a historical 0.0% default rate. Investors can choose from short-term investment options ranging from 3 to 36 months, ensuring flexibility and safety. Kilde’s investments are backed by institutional-grade quality checks and funds are safeguarded by DBS Bank.

Should You Use Unit Trusts or T-Bills for SA Shielding?

When deciding between unit trusts and T-Bills, consider the following:

You can also consult a financial advisor to further solidify your decision of which financial vehicle would suit your financial situation best.

What Are the Risks of SA Shielding?

While it is an effective strategy to optimise your retirement savings, it is not without risks. Here are some potential drawbacks that you should consider:

• Capital Losses: Investments in unit trusts and other market-based instruments can fluctuate in value. This means there's a potential for capital losses if the market performs poorly. Even low-risk investments carry some degree of market risk, and you might end up with less than you initially invested.
• Loss of CPF Interest: Temporarily transferring funds from your SA to other investment vehicles can result in a loss of CPF interest during the investment period. Since the SA typically offers a higher interest rate compared to many low-risk investments, you might miss out on this superior interest accrual, especially if your chosen investment does not perform as expected.
• Impact on Mortgage Payments: If a significant portion of your CPF funds is tied up in investments, you may have fewer funds readily available for mortgage payments. This can be particularly problematic if you rely on your CPF savings to service your home loan. Ensuring that you have enough liquidity to meet your mortgage obligations is crucial when considering SA shielding.

Through understanding these CPF shielding warnings, you will be able to prepare and mitigate potential downsides and make better-informed decisions.

When is a Better Time to Do SA Shielding?

The ideal time to implement this process is a few months before your 55th birthday.

This timing ensures you have sufficient time to research and select appropriate low-risk investment vehicles, complete all necessary transactions, and effectively shield the desired amount of your SA funds.

Starting the process a few months in advance allows you to navigate any unforeseen delays and ensures that your investments are securely in place before the CPF Board forms your Retirement Account. This proactive approach maximises the benefits of shielding, helping you to retain a larger balance in your SA and continue earning higher interest rates.

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Final Thoughts

CPF SA shielding is a powerful strategy to optimise the growth of your retirement savings. By temporarily transferring your SA funds to low-risk investments like Treasury Bills (T-Bills), you can effectively protect your savings from being transferred to your RA. This strategy allows you to continue benefiting from the higher interest rates offered by the SA, which can significantly enhance your retirement nest egg over time.

Whether you choose T-Bills, unit trusts, or Kilde’s private bonds, the key is to carefully plan and execute your strategy. By doing so, you ensure that your savings continue to grow at a higher rate, providing greater financial security via a larger passive income and peace of mind in your retirement years.

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Sources:

https://www.mas.gov.sg/bonds-and-bills/singapore-government-t-bills-information-for-individuals

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_{The views expressed in this blog post are solely my personal opinions and do not constitute professional financial advice. I am simply sharing my opinions with no guarantee of accuracy or completeness. No reader should make decisions based solely on the contents of this blog post. Readers should consult their own financial advisor before making any investment decisions. Neither the author of this blog post, Kilde, nor its employees will be held liable for any financial losses or damages that may result from the use of the information contained herein. Investing contains risks, including total loss of capital. Past performance does not guarantee future returns. Please conduct your own research before investing.}