SINGAPORE – Middle-income workers will see more money flowing into their Central Provident Fund (CPF) accounts from September, thanks to the gradual increase in the contribution ceiling unveiled in the Budget earlier in 2023.
As part of moves to boost retirement adequacy, the salary ceiling for CPF contributions is rising from $6,000 to $8,000 by Jan 1, 2026.
Employees aged 55 and younger contribute 20 per cent of their monthly wages to their CPF, while their employers contribute 17 per cent.
Changes in monthly salary ceiling
On Sept 1, the CPF monthly salary ceiling was raised by $300 to $6,300. It will hit $6,800 on Jan 1, 2024, $7,400 on Jan 1, 2025, and $8,000 on Jan 1, 2026.
CPF annual salary ceiling remains unchanged
Apart from the CPF monthly salary ceiling, the annual salary ceiling caps the amount of contributions payable for all wages received in the year.
CPF breaks down total wages into ordinary wages and additional wages.
The ordinary wage ceiling limits the amount of ordinary wages that attract CPF contributions in a calendar month. This limit is going up to $8,000 from 2026.
Meanwhile, wages not classified as ordinary are dubbed “additional wages”. The ceiling for this limits the amount of additional wages that can attract CPF contributions, and is applied on a per employer, per calendar year basis.
The annual salary ceiling, which caps the total amount of ordinary and additional wages that attract CPF contributions, will remain at $102,000. But it will be reviewed periodically to ensure it continues to cover most CPF members.
The CPF annual limit on total contributions by employer and employee will also remain at $37,740.
From Sept 1, 2023
The higher CPF salary ceiling of $6,300 that came into effect in September means middle-income workers will see higher contributions but slightly lower disposable income.
In this example, the employee is no older than 55 and earns $7,000 a month with two months of bonus of $14,000.
Ms Lorna Tan, DBS Bank’s head of financial planning literacy, notes: “A person will enjoy overall higher CPF contributions if his salary is above the current CPF monthly ceiling and total wages below the CPF annual wage ceiling of $102,000.”
From this example, there will be a drop in disposable income of $60 a month from September and $160 a month from January, compared with August 2023.
Ms Tan says the reduction in disposable income might mean some CPF members will need to review their budgets and cash-flow needs.
She encourages workers to stress-test their finances and retirement adequacy, with assumed inflation rates ranging from 3 per cent to 4 per cent.
Solutions specialist Tan Choong Hwee from wealth advisory firm Providend notes: “Employees should review and adjust their monthly cash flow and budget, preferably keeping their savings and investments while reducing their discretionary expenses, or using more CPF for mortgage payments.”
The change will inevitably increase manpower costs for employers, so they should analyse how the additional outlays will impact their business and evaluate ways to address the issue.
The annual increase in CPF contributions in 2024 for the example above is $3,552.
If you earn over $6,000 a month and your bonus is $30,000 or higher
If you earn more than $6,000 a month and your bonuses are $30,000 or above, your annual CPF contributions do not change as the annual salary ceiling remains at $102,000.
Let us assume that you are no older than 55, earn $7,000 a month with five months of bonus ($35,000). While your monthly CPF contribution goes up to $2,331 from this month and $2,516 next year, overall, your annual contribution does not change because your pay and bonus ($84,000 + $35,000) exceed the annual salary ceiling of $102,000.
From Jan 1, 2026
The CPF contribution ceiling will rise to $8,000 on Jan 1, 2026.
Mr Alfred Chia, chief executive of financial advisory firm SingCapital, notes: “This adjustment is to help members who are in a higher income bracket to save more for retirement. It also encourages active employment.”
Mr Chia adds that employers’ salary costs will rise if they have a large pool of staff earning more than $8,000 a month, so the period to 2026 allows firms to make a gradual adjustment for this.
“The overall goal of these changes is to motivate employees to save more for retirement and potentially benefit employers by having a more motivated workforce,” he says.
Boosting your retirement kitty
Will the additional contributions be sufficient?
For a 45-year-old male employee who earns $8,000 a month and has not reached the annual salary ceiling, the maximum reduction in monthly take-home pay is $400. However, his CPF contributions would have risen by $740 monthly.
This means he would have more Ordinary Account and MediSave monies that can be used for his housing and healthcare needs, hence reducing any related out-of-pocket expenses.
If the monies remain in CPF when he reaches 65, he can get up to $680 more in monthly CPF Life payouts.
With the compounding effect, the increase in the CPF salary ceiling would enable middle-income members to meet their Full Retirement Sum or even Enhanced Retirement Sum.
The Full Retirement Sum for 2023 is $198,800. If an individual turning 55 this year can set aside this sum, he would be eligible for CPF Life payouts of $1,620 every month when he turns 65.
The 2023 Enhanced Retirement Sum is $298,200. Similarly, this gives monthly payouts of between $2,210 and $2,370 for life from the age of 65.
CPF Life payouts are meant to fund basic expenses. Whether they will be enough for retirement depends on a person’s desired lifestyle, says Ms Tan.
She notes that the payouts from the CPF Life Standard Plan are constant, meaning they may not keep up with inflation over the long term.
Financial planners suggest building other streams of retirement income to supplement the CPF Life payouts, and that means to start planning early for retirement.
SingCapital’s Mr Chia says: “Planning for retirement is not just a financial obligation; it’s a commitment to securing your future and ensuring a comfortable, stress-free retirement.
“The choices you make today will shape your tomorrow. Start early, save wisely, and invest in your retirement, for it’s the key to your well-deserved and fulfilling golden years.”
Other CPF changes in tandem
Ensuring retirement adequacy is an ongoing process, with many measures to support citizens in building up their nest egg.
One such initiative announced at this year’s National Day Rally by Prime Minister Lee Hsien Loong is the Majulah Package.
One of its components is an Earn and Save bonus for eligible seniors who are working. Lower- and middle-income workers will get extra CPF funds of up to $1,000 a year, on top of the usual employer and employee contributions.
Other changes have already been announced. Older workers will enjoy higher employer contributions rates. There were increases on Jan 1, 2022, and Jan 1, 2023, with the full increase to be rolled out by 2030. The next increase kicks in on Jan 1, 2024.
Workers aged above 55 to 60, will see total CPF contributions rise to 31 per cent of their pay, up from 29.5 per cent now. This includes 16 per cent from the employee (up from 15 per cent) and 15 per cent from the employer (up from 14.5 per cent).
Similar to increases in 2022 and 2023, the rise will be fully allocated to the CPF Special Account – earning interest of 4.01 per cent – to help senior workers save more for retirement.
Another change afoot affects platform workers such as private-hire car drivers. Currently, they make CPF contributions only to their MediSave accounts.
From the second half of 2024, platform workers born in 1995 or later will have to contribute to the CPF Ordinary and Special accounts. Older platform workers will have the option to join in and contribute.