Friday, April 23, 2021

CPF Shielding Lifehack is an Abomination that must be ended by the CPF Board



So a few really smart CPF hackers discovered this CPF lifehack that you can read about here

Apparently, authorities will populate your CPF Retirement Account with your CPF Special Account first before drawing upon your CPF Ordinary Account. If you allow the default action to take place, then you can lose out on thousands every year because you can't boost your CPF-OA's 2.5% to 4%. So some guy suggested that you buy third party products with CPF-SA just before your CPF-RA is set up (at age 55) and then sell these securities off to return the money to your CPF-SA after your CPF-RA is set up. This ensures that the bulk of your CPF-OA will be pushed into your CPF-RA and the CPF-OA monies will work hard for you from age 55 to age 65. 

The difference in returns is non-trivial, suppose the Enhanced Retirement Sum when you retire is $280,000, hacking the difference of 1.5% interest will net you about $4,200 every year.

Personally, I'm all for CPF shielding. I suspect that I may not need to do so because my CPF-OA is kept small by my mortgage, but this is a serious penalty for folks who do not understand or fail to perform this manoeuvre just before age 55.

What I'm upset about is that authorities actually allow the hack to even take place. 

To execute the hack, I am forced to buy third party products, earning them a little bit of kopi money through fund expenses and commissions, otherwise, I may have to sacrifice an extra $4,200 every year in free interest from the government.

To me, the fact that this hack exists is a failure of policymaking. 

The finance industry gets to earn something every time this hack takes place and thousands of uneducated citizens may not be able to execute this hack in the first place because they don't really understand our CPF system.  The pushes the importance of having a financial education even more. 

As a voter and citizen, we should not remain silent about this. 

The CPF board should simply ask the citizen whether he would prefer the CPF-OA to be used to top up into the CPF-RA first with the status quo as the default option. 

Give us a choice in the form of an online survey at age 55 instead of greasing the palms of the private sector (or some commissioned FA who would happily sell this hack to retiring customers. )

I think the problem is that very few citizens are aware of CPF shielding hack, why it exists, and why it's a consequential hack for us. 

As of this moment, it falls to financial bloggers and CPF ambassadors to provide feedback to CPF board employees and tell them that this is an issue that should be addressed ASAP. 

CPF board probably would not want to talk to a troublemaker like me, but if you are a CPF ally, please let it be known that Singaporeans are getting smarter and are less tolerant of weaknesses in our social security system.    


     

23 comments:

  1. Those who know this hack will DIY through Dollardex or Poems to avoid commissions.

    The preferred fund is the Nikko Shenton Short Term Bond Fund which has an annual total expense ratio of 0.39%. For a person looking to shield $1M of SA money, that's $10.68 per day.

    While that fund is still an investment product & the price can fluctuate daily, but if you're prepared to hold 1-3 months before selling & transferring back to SA, you'll usually be able to get slight capital gains.

    There are actually super cash rich people who shield BOTH SA & OA, using their cash-in-bank to top up their RA. The amount of OA+SA annual interest literally provides them with another perpetual annuity income stream, which they can withdraw anytime if they want since they're over 55.

    Oh, due to the minimum CPFIS rules, $40K of SA and $20K of OA can't be shielded ... so a minimum of $60K from combined SA+OA will be transferred to RA.

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  2. indeed this is wrong and unfair. Not sure why they govt never take actions years ago to close this gap when they were discussed in a few blogs. Time for the govt and cpf to come clean on this. If they believe this is okay, they should publicise this and educate everyone to try to benefit from shielding. IMHO, it is a shady criminal dealing in the dark

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  3. I gotta defend the government here. It is not shady and criminal. The policy is CPF-SA as the primary retirement fund so will be utilised first.

    AS the private sector, it is indeed the FAs job to exploit this lacuna to make some extra money for themselves. Nothing wrong there.

    It's up to us to gently coax the CPF board to grant us an option to use CPF-OA to top up the CPF-RA fund. That's all.

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  4. The whole SA Shielding process is made up of 2 different schemes for 2 different purposes introduced at 2 different times:

    1. CPFIS was introduced to allow investment using CPF money and the requirement to set aside $40k/$20k for SA/OA was to protect members from plunging the whole sum into investment, which is inherently more risky than keeping in CPF accounts.

    2. RA creation with specific retirement sum amount was introduced to address retirement adequacy. It makes perfect sense to transfer from SA first to form RA as SA was intended for retirement.

    SA Shielding was a clever hack to leverage on 2 different schemes to achieve its purpose. CPFB knew about the hack, but couldn't plug the hole because both CPFIS and RA creation are legitimate and allowable processes for members to act upon. Do you want CPFB to plug the hole by forcing you to liquidate your SA investment to meet the FRS requirement at 55?

    As for the suggestion to let you choose the amount from SA and OA for FRS in RA, won't that also discriminate those with low OA balance (for those who are low income earners and those who used their OA for housing)? Does that mean the government need to implement minimum wage model to boost their income and scrap the use of OA for housing?

    There are wide ranging considerations in deliberating on policy changes. It is not an easy task (if not an impossible task) to satisfy everybody.

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  5. (1) I did not suggest forcing folks to liquidate SA investments.
    (2) I did suggest giving Singaporeans the option of loading their CPF-RA with CPF-OA first.

    This is not discriminatory against citizens with a low CPF-RA because the the lifehack is also less conducive for folks with a low CPF-OA balance.

    I did not make a suggestion on minimum wages or to scrap OA use for housing.

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  6. No no no, I wasn't saying/implying that you made those suggestions which you didn't. I was just thinking out loud on various considerations in addressing this "failure of policymaking". I do not proclaim I have full understanding on the impact of having the option to transfer from OA first. Neither I am in any position to represent the authorities' view on this matter. I'm just sharing my thoughts and opinions.

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    1. Agree that 3 risks you mentioned exist. The way to mitigate those risks for SA Shielding is to keep the holding period as short as possible. It is possible to keep the holding period down to 5 business days, invest 3 business days before 55th birthday, and liquidate immediately after RA created.

      Take Nikko AM Shenton Short Term Bond Fund as an example. I downloaded their price history from Yahoo Finance here:
      https://sg.finance.yahoo.com/quote/0P00006G1T.SI/history?p=0P00006G1T.SI

      The largest 5-day decline was -0.98% and it happened from 18 Mar to 25 Mar during the market crash last year. Net P&L for the birthday month would be +1.5%/12 -4%/12 - 0.98% = -1.19% (gain from OA to RA - SA interest loss - investment loss). So, the worst case historically takes about 10 months to recoup the loss.

      Of course it is possible to suffer greater loss in future. It is really up to individual to assess the risk and decide for themselves whether they want to take it. Definitely want to go in with our eyes open.

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  8. Thanks for the Huarong sharing. It strengthens my case !

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  9. Actually I thought of a simple way to plug the hole for SA Shielding hack, CPFB just simply discontinue CPFIS using SA. After all SA is intended for retirement needs and 4% risk-free interest rates is pretty decent.

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  10. I agree with your solution too ! The industry will be very displeased though. Hahaha !

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    1. Haha, neither will they be happy with your suggestion to allow OA-First option in creating RA.

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    2. If you have to go through a salesman / saleswoman like a FA or agent or broker or remisier, then ANY hack WON'T be worth it due to the fees, charges & commissions.

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  11. I find it strange some people seems to be angry that this hole exist and complaining why it is not plugged, strange.... For lower risk, use this fund instead LionGlobal New Wealth Series - LionGlobal SGD Enhanced Liquidity A Acc SGD

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    1. Probably not as angry as FAs reading my blog post. Haha !

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    2. But LionGlobal SGD Enhanced Liquidity A Acc SGD is only available for cash and SRS investment, not for CPFIS OA & SA investment.

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  12. If I could use that Lionglobal fund, I would have used it. Unfortunately it is not approved for CPFIS-SA. Neither are those super safe money market funds from Fullerton, LionGlobal or Philips Securities.

    The reason? Coz they are TOO SAFE & will not generate 4% or higher long-term returns.

    In the olden days, you could put your SA into FDs .... people will surely use 1-month or 3-month FDs to carry out this hack.

    At the moment, the Nikko short term bond fund is the least volatile investment available for CPFIS-SA. During the recent Huarong upheaval, it dropped -1.8%. But it has since recovered +3.8% to all time highs within a couple of weeks.

    When this hack was highlighted in Straits Times (last year?), the journalist was lucky and managed to get 5% gains in the 1-2 months she took to execute it.

    Like I said, if you can hold for 1-3 months, it is very likely you'll not experience capital losses. Even if it's a 0% breakeven after 3 months, that's a good tradeoff to be able to continue having your money in SA with your full control & access.

    Those who cannot stomach even 1 day of price decline or short-term declines of -1% to -5% won't be able to carry out this SA hack.

    And therein lies the rub ... it is almost guaranteed that the vast majority of people won't execute this hack even if CPF conducts full training courses for it & screens it on TV. CPF monies are sacrosanct --- the thought of losing even a single cent, even if it's just for 1 day, cannot be tolerated by the masses.

    That's why CPF tidak apa about it.

    Oftentimes human psychology trumps any slick evidence-based investment strategy or money hack. i.e. Art beats Maths lol.

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  13. The problem can be solved if CPF-SA investment selections can be tightened further. Short duration bond funds and investment grade bond funds should not be available for CPF-SA investments. I mean realistically, one expect these funds to outperform CPF-SA interest rate over the long term, of say, more than 20 years?

    The problem with CPF-SA investment scheme had been it had been focused on medium to lower risk categories of the funds under the scheme. Which is contradicting, since CPF-SA funds are locked in for very long term and realistically, only balanced and equity funds can have a chance of outpeforming its high interest rate in the long term. At its current form, I would only consider balanced funds for CPF-SA investments and nothing else.

    Forget about about the hack. If you have a long term investment horizon for your CPF-SA, try to invest in balanced funds like First State Bridge.

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