CPF LIFE – How It Works
CPF Board has recently released more details on the CPF LIFE Scheme. The CPF Life Payout Estimator and Information Booklet can be found on their website here – CPF LIFE Website. I’ve done some comparison between the CPF LIFE vs Commercial Annuity already, I’ll do some simple comparison between payouts under the new CPF LIFE vs Minimum Sum Scheme (MMS).
The Minimum Sum Scheme
Depending on your birthday, the corresponding Minimum Sum (MS) will be different for different ages. This MS would provide a monthly payout that would last approximately 20 years. The prevailing Minimum Sum (MS) is $117,000.
The Draw Down Age (DDA), ie when you can start receiving the payout, is different for different ages.
Table 1 MMS DDA
Assuming a CPF member aged 55 having the MS of $117,000 fully in cash, he can start receiving a monthly payout of $1,040 for about 20 years. The interest rate is assumed to be 4% per annum.
Payout under CPF LIFE
Certain CPF members will automatically be included under the CPF LIFE scheme while others can opt to join in. Table 2 below indicates the various scenarios.
Table 2 CPF LIFE Eligibility
Upon joining CPF LIFE, depending on the age, gender and plan selected, a certain percentage of the RA savings will be transferred to the CPF LIFE account as premium for the annuity. The Table 3 shows some figures derived from the CPF LIFE Payout Estimator. As the LIFE Plus and LIFE Income plan deducts ALL of the RA savings as premium, only LIFE Basic and LIFE Balanced plan is shown.
Table 3 CPF LIFE Premium Rate
In addition to the Annuity Premium deducted upon joining CPF LIFE, the extra 1% interest earned first $60,000 in the SMRA savings and and top ups (if any) will also be deducted as Annuity premium around 2 months before DDA in the same ratio as the initial deduction when first joining CPF LIFE.
Payout will start with whatever amount that is left in the RA account after deducting the annuity premium plus earned interest. Payout from the CPF LIFE Annuity will begin after the monies in the RA account exhausted. Figure 1 shows how the payout is derived from the RA account and the CPF LIFE Annuity.
Figure 1 CPF LIFE Annuity Payout Graph
The Table 4 shows the annuity payout starting age for the different ages. Only 3 of the plans; LIFE Basic, LIFE Balanced and LIFE Plus provides a refund of any unused premium. LIFE Income does not provide any refund of annuity premium.
Table 4 Annuity Payout Start Age
Interest gain from the annuity premiums is paid into the Lifelong Income Fund and pooled together with interest earned from the annuity premium from other CPF LIFE participants to fund the life long payout. Meaning to say, participants will potentially loose the interest if he/she pass away too early. However, the participant will gain more than his/her rightful share of the interest by living beyond a certain age. The Table 5 illustrates the estimated amount of interest lost at different passing age for a 55 year old make with $117K in the RA. Note that for LIFE Income, the ‘loss’ includes the annuity premium as this plan does not provide any refund of unused premium. Calculations do not take into account the extra 1% interest for the first $60K from the SMRA account nor any top-ups. Negative figures indicate a ‘gain’ for the participant. Also note that the red region does not indicate the exact age of end of premium refund as the table only illustrate ages in 5 year increment. The calculations are from my own understanding of the scheme and is very much a rough estimation. Readers should be mindful that there could be errors in my assumptions and/or calculations.
Table 5 Estimated Interest Lost
The following table shows the estimated break-even age for the various plans in order to get back all the principal and rightful interest for a 55 year old male with $117K in the RA account with a 3.75% annual interest . As the monthly payout is different, different plans will give a different break-even age. Dying before the break-even age will result in a ‘loss’. Again, the extra 1% interest from the first $60K from the SMRA account is not taken into account. Figures shown are rounded to the nearest whole number.
Table 6 CPF LIFE Estimated Break-even Age
Compared to the MMS payout, CPF LIFE plans (other than LIFE Income) give a lower monthly amount but provides a lifelong income, unlike the MMS which lasts around 20 years. For MMS, there won’t be any ‘loss’ of principal or interest as any balance in the Minimum Sum will be refunded to the beneficiaries. CPF LIFE participants face a possible ‘loss’ of principal and/or interest as only the unused annuity premium is refunded for 3 plans. CPF Income does not refund any annuity premium at all. CPF LIFE participants take on this risk of loss in exchange for a lifelong income. However, as the interest rates and mortality rate are not guaranteed and subject to change, any changes to could impact the payout amount.
As there are too many permutations to the payouts depending on gender, age, interest and RA amount, the above comparison for CPF LIFE are done for a 55 year old Male with $117,000 in the RA account. Interest rate is assumed to be 3.75% pa. Also, limited information relating to how the payout calculations are arrived at is clouding the understanding of CPF LIFE.
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A typo in Table 5: the age on row 4 should be “80″ rather than “70″.
Hi Ben,
Have amended the typo. TKS!
U did not caculate the interest earned in the RA account for balanced and basic fund.
Hi MJM,
May I know which table u are referring to?
I had assumed an interest rate of 3.75% for the calculations.
I’m refering to the RA Account. [Basic & Balanced].
The lost interest should also be accounted in the CPF RA.
Hi MJM,
The interest earned for the balance RA savings (after deducting the annuity premium) would be paid out or refunded upon death. The potential loss comes from the interest on the annuity premium would are not refunded on death. LIFE Income could result in a loss of principal as it does not provide any refund.
I’ve added in the deduction of annuity premium from RA interest at age 65. I do not know if this answers your question. But thanks for highlighting the error.
If payout for PLUS is at 65, how come the loss increases in your table 5?
It makes no sense because the person takes more so the loss should be reduced. This is seriously misleading the readers.
Hi SGT,
The ‘losses’ arise out of the potential interest and compound interest on this potential interest should death occurs. Although payout starts from age 65, this payout is from the annuity premium. Only balance premium is refunded on death. The interest from the annuity premium is not refunded. So, there is this ‘loss’.
The loss will increase initially due to the new interest on the balance premium and compounding effect.
I certainly have no intention of misleading anyone and there might be errors in my calculations and or assumptions. Please share any information you might have so that I can improve.
Correct me if I am wrong:
For PLUS plan @66 year-old, the annual potential interest is $169,070.14×3.75%=$6,340.13 while the annual payout is $1042×12=$12,504.
I don’t mean you mislead the readers but just need clarification. It seems the bequest is a non-linear compensation over the years which is misleading in CPF’s graph.
Hi SGT,
I see where you are coming from. From my understanding, there are 2 ‘accounts’. 1 is for the annuity premium, the other is the interest.
Upon death, only the balance premium is returned, meaning to say, although the annual payout is higher than the interest, this payout amount is deducted from the annuity premium ‘account’ and not the total amount (premium + interest). Eg, should death occurs at age 66, the bequest will only be $117k – ($971×12) = $105,348. The whole of the interest is ‘lost’. So until the whole annuity premium is paid-out, the ‘loss’ will keep increasing as the bequest amount does not include the interest.
The straight line in CPF’s graph is thus not wrong as the same amount (assuming no change to payout) is deducted from the annuity premium every month. The compounding effect of the interest is not there as the bequest does not include interest.
Please correct me if my understanding is wrong.
I cannot duplicate your figure when I use the cpf website. Can you provide the basic data used in your tabulation to verify your figures?
You mentioned nothing of L-bonus and the 1% Extra Interest promised on the first $60k.
Hi SGT,
I had used a simple calculation to find the Future Value of the Annuity Premium at the respective age of death, taking account the monthly payout if any, then minus the balance annuity premium that is returned.
The L-bonus is a temporary measure, thus I left it out. I also have not taken into account the extra 1% interest for the first $60k as mentioned in the post.
The CPF Life Estimator have more info since I posted. The bequest amount is now shown in greater detail. I will try to study it when I have the time.
Thanks for your reply.
i noticed that the bequest return is a NON-LINEAR curve so interests are non-uniform over the years (I read the fine print in CPF website). Clearly, CPF Board makes it tough for us to calculate the profit/loss for the scheme.
Also, I still cannot figure out why the increase in losses for the PLUS plan (after 65). It seems logical that once the payout starts, the losses should cut. What causes the loss to shrink later between 75 to 80 year-old???
Hope you can show us an illustration so we can understand better.
Hi SGT,
Whether the bequest amount is linear or not will depend on which LIFE plan and when the bequest is given out. For Life Basic and Life Balance, the bequest amount will not be linear when the monthly payout comes from the RA account as the interest earned will be returned on death. The interest is the reason for the non-linearity. Once the payout comes from the Annuity, the bequest is linear as no interest is taken into account. However, I am not too sure how the extra 1% interest from the SMRA will affect this.
For a annuity premium of $117k, Life Plus payout will last around 10 years ($971 x 12 X 10) = $116,520. I am not too sure how the extra 1% will affect this. So after around age 75, the payout will start to come from the Lifelong Income Fund. Assuming that interest is paid to the CPF member instead of going into the Lifelong Income Fund, the losses should start to decrease as the payout starts to come from the interest. So, you see a decrease in the losses from age 75 to 80.
The graph here shows the Life Plus payout in the my way of calculating the ‘losses’ and ‘gain’. The graph is not to scale and is just an illustration.