What Is the Central Provident Fund?

The Central Provident Fund (CPF) is a mandatory benefit account providing retirement earnings and healthcare for Singaporeans. Contributions to the retirement account originate from both the employee and the employer. There are three types of CPF accounts—ordinary, special, and medisave accounts. 

Key Takeaways

  • The Central Provident Fund (CFP) is an obligatory benefit account (for retirement, healthcare, and housing) in Singapore that all residents are required to contribute to. 
  • Residents can withdraw from the CPF at age 55.
  • Like the U.S. Social Security system, delaying CPF withdrawals means a higher payment later in life. 
  • The CPF is mandatory, unlike a company’s 401(k) that employees can opt-out of. 

Understanding the Central Provident Fund

The Central Provident Fund started in 1955 as a way to assure all Singaporeans would have income and financial stability in retirement. The CPF was controversial when first introduced with considerable opposition to the concept of a forced retirement program, but it became more popular over the years and has expanded to include healthcare (medisave) and public housing assistance.

Singaporeans can begin drawing from their retirement account at age 55, and similar to the Social Security system in the U.S., waiting to receive funds until an older age means more money will be in the account.

The employee and employer each contribute to the CPF account. The funds in the CPF account are conservatively invested to earn around 5% per year. In 1968, the CPF expanded to provide housing under the Singapore Public Housing Scheme. In the 1980s, the program expanded again to provide medical coverage for all participants.

Some CPF participants wanted an option for taking on more investment risk to earn a better return than the average 5 percent, so in 1986, a new investment option allowed participants to manage their own accounts. Shortly thereafter, the program added an option to convert the account into a fixed annuity upon retirement. At the present time, participants with a minimum balance of $40,000 in their account at age 55, or $60,000 at age 65, can select a CPF LIFE annuity plan. There is no requirement to convert to the annuity if the plan participant prefers to keep their assets in the current retirement account.

Special Considerations

The CPF is a mandatory retirement system unlike the 401(k) plan in the U.S., where employees can elect to opt-out of a company’s 401(k) plan if they choose. Many company 401(k) plans in the U.S. will auto-enroll new employees into their retirement plan and typically deduct 3% of their pay on a pre-tax basis unless the employee specifically requests in writing not to participate. The impacts of this choice can be far-reaching for younger workers who opt out given the many years of lost interest compounding.

At the heart of the CPF and the 401(k) retirement plan is the wisdom in paying yourself first through an automatic payroll deduction system. These regular contributions are matched up to certain levels by the employer, who is in effect giving the employee extra pay to support them in retirement, so choosing not to participate in the plan means turning down that extra pay.