CPF SA Shielding: What are the pros and cons?

What is CPF SA Shielding?

If you are searching around for tips to maximise your CPF accounts, you might have come across the term Special Account (SA) Shielding.

As the term suggests, SA shielding is all about ‘shielding’ as much of your SA funds from flowing into the Retirement Account (RA). It is more relevant to those who are turning 55 years old soon.

When you turn 55 years old, CPF will create your RA for you, on top of your existing Ordinary Account (OA) and SA. The RA is mainly for your retirement needs and also determines the amount of CPF Life payouts you would receive at age 65 or 70 years old.

Once your RA is created, current funds from both your OA and SA will automatically flow into it, up to the prevailing Full Retirement Sum(FRS) for that year. 

In terms of priority, SA funds would be transferred into the RA first before OA funds. 

I have included a few examples below using the prevailing FRS for 2023, which is $198,800.

Example 1: SA funds not sufficient to fully cover FRS:

Example 2: SA funds surpass prevailing FRS:

As the CPF SA interest rate is higher than the OA interest rate, some Singaporeans may prefer to have more of their OA funds rather than your SA funds going into their RA. 

Hence, some individuals may choose to invest their SA funds to ensure that their OA funds rather than SA funds are transferred into the RA. That’s how the term ‘SA Shielding’ came about.

If you are intending to do SA shielding, do note that $40,000 from your SA would still flow into the RA since you can only invest SA funds in excess of $40,000.

In essence, the whole purpose of SA shielding is to keep as much funds as possible in your SA rather than OA to earn the higher SA interest rate.

If your combined CPF balances (both OA and SA) have yet to hit the prevailing FRS, SA shielding does not really serve any advantage.

What are some common methods of SA shielding?

Generally, SA shielding can be done by investing in any approved investment products under the CPFIS.

However, most individuals generally prefer investing in either unit trusts or T-Bills as compared to other products as they have better liquidity.

Should you use unit trusts or T-Bills for SA shielding?

In deciding whether to use unit trusts or T-bills in SA shielding, we would take into consideration our risk appetite and investment time horizon.

Unit Trusts offer better liquidity as you can sell the holdings right after your RA is formed. This also means that you would lose up to 2 months of CPF interest (month of application and month of liquidation). 

However, investing in Unit Trusts has a higher risk compared to T-Bills as Unit Trusts have investment risks and returns are subject to market conditions. There are also management fees involved. 

On the other hand, T-Bills are safer as it is capital guaranteed if you hold the T-bill till maturity. You can learn more about what are T-bills and how to invest in T-bills here.

You would earn interest when you invest in the T-bill, with the cut-off yield on the 6-month Singapore T-bill at 3.74% in the auction on 7 December 2023. However, you would potentially lose either 7 or 8 months of CPF interest depending on the maturity of the T-bill. 

I have included a table below to summarise the differences.

What are the risks of SA shielding?

While SA shielding can help to maximise the return on your CPF funds, there are inherent risks to it. This was highlighted in a parliamentary response on SA shielding in 2022.

#1 - You may incur capital losses

Should you choose to put your SA funds into a unit trust, be mindful that you might suffer some loss due to market conditions, management fees and transaction fees.

While there are more than 100 Unit Trusts for investors to choose from, we should look for a fund that has lower risks to reduce the likelihood of incurring capital losses from investing into the unit trust. 

Based on the classification by CPF, there are more than 10 unit trusts that are seen to be having ‘low to medium risks’. 

The table below summarises their expense ratio, 1-year and 3-year performance of these unit trusts as of 4Q2022.

The fund with the lowest expense ratio and best 3-year annualised return as of 4Q2022 is the Nikko AM Shenton Short Term Bond Fund.

#2 – Loss of CPF interest 

Regardless of whether you choose to invest your SA funds in T-Bills/Fixed Deposits or Unit Trusts as a form of SA shielding, you will no longer earn the SA floor interest rate on those funds.

We’ll share more later on when might be a better time to do SA shielding to minimise the loss of CPF interest.

#3 - You might have less funds to pay for your mortgage

If you are still financing your housing needs via your OA funds, doing the SA shielding might inadvertently force you to use cash for your mortgage payments instead.

As funds from your OA (inclusive of $40,000 from SA) would be used to form your RA, up till the prevailing FRS, you might not have enough leftover OA funds to cater for your mortgage needs.

While you can reduce the FRS to Basic Retirement Sum (BRS) instead by pledging your property, you would still need to ensure enough OA funds for present and future mortgage needs.

Another thing to note is the reduced CPF allocation to OA from our jobs as we get older.

As seen, only around 40.69% of CPF contributions from your employment go to your OA at age 55. This could be another consideration before doing the SA shielding if you are still using OA funds for your housing needs.

When is a better time to do SA shielding?

In simple terms, should you wish to do a SA shielding, you’d need to do so before your 55th birthday. 

If you are planning to invest in T-bills/Fixed Deposits, make sure that the maturity date is after your 55th birthday. If it is before, the funds that you receive after maturity would flow into your RA. 

For those opting to invest in Unit Trusts instead, do it as close to your 55th birthday as possible.

If your birthday falls on the 1st day of the month instead, do it on the last week of the previous month.  If your birthday is on 1st April, you would want to invest in Unit Trusts within the last week of March.

This ensures that you lose the least amount of potential CPF interest, as you can start earning CPF interest on your SA funds from the following month after liquidating your investments.

What would Beansprout do?

SA shielding can potentially allow more of our CPF funds to earn a higher interest rate after we reach 55 years old.

However, we should also take into consideration investment risks and loss of CPF interest in doing so. 

If you still have a long way to go till 55 years old, you can consider an OA to SA transfer if you are looking to earn a higher interest on your CPF funds.

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