Thursday, 5 May 2016

Retirement - Superannuation vs CPF

My post on What are Retirement Funds is the second most read after the post on Monthly passive income hits S$1,000. It does seem like personal finance topics like passive income and retirement continue to be among the most popular. 

I thought it would be interesting to have a post about my experience with Superannuation in Australia as a retirement fund scheme compared to Central Provident Fund (CPF) in Singapore.


Upfront disclaimer - I can only compare my experience with Superannuation during my 4 years working in Australia vs CPF during my 3 years working in Singapore. I'm aware this is an insufficient time frame for the benefits of each retirement fund scheme to realise but this is just my opinion based on how each system has worked out for me so far. The facts may also not be fully accurate as I am writing some of them from memory.

Overview of my Superannuation in Australia

When I started working in Melbourne after graduation, my employer contributed 9% of my salary every month to a Superannuation fund of my choice. The employer usually has a preferred Superannuation fund and I chose that because I had no knowledge of any Superannuation fund. I tried reading up but was overwhelmed by the number and range of Superannuation funds available. To be fair, it was my first full-time job in Australia and I was coming from Singapore where everyone only had one retirement fund that contributions go into i.e. CPF.

I decided not to make any voluntary contributions because I was unsure of how long I will be living in Australia. The Superannuation fund had 4 main investment options - cash, conservative, balanced and aggressive. I selected the aggressive investment option since it had the highest return over the long term due to the biggest exposure to equities.

This meant that the monthly contributions by my employer went towards purchasing units in the aggressive investment option of my Superannuation fund. It's essentially a dollar-cost averaging approach and the valuation of the units change depending on the value of the underlying assets of the fund. Hence, the value of my retirement funds in Australia could vary significantly with each year since it depends to a large extent on the performance of domestic and international stock markets.

Life, disability and income protection insurance premiums were also deducted from my superannuation fund monthly. The coverage amounts were good relative to the amount of premiums paid. This is a benefit from selecting the preferred Superannuation fund of the employer.

However, there is a monthly account maintenance fee deduction and the amount can vary depending on whether the investment option is cash, conservative, balanced or aggressive. Superannuation fund fees can really eat into its returns if you are not careful.

After I moved to Sydney and started working for a different employer, I decided to roll the holdings in my previous Superannuation fund in Melbourne to the new preferred Superannuation fund in Sydney. This can be a hassle when you think about the number of times a person can change jobs over the span of a career. It's probably the reason why Lost Superannuation is such a big issue in Australia since it can be difficult to keep track of all of your Superannuation fund holdings.

Overview of my CPF in Singapore

When I moved back to Singapore, I had to leave my Superannuation funds in Australia since I can't withdraw it due to my status as a Australian permanent resident. Before leaving, I changed the investment option of my Superannuation fund to cash to reduce volatility in the value. It will grow much more slowly over time but made the most sense for me since there are no longer any monthly contributions to my Superannuation fund.

I had previously written about how I manage my CPF in Singapore. Basically, a Singapore citizen or permanent resident employee has only one retirement fund in Singapore i.e. CPF. There are no other choices available, which is a lot less confusing compared to Superannuation. In my case, the employer contributes a higher percentage (17%) of my salary to CPF. However, I have to contribute an even higher percentage (20%) of my salary to CPF. This is mandatory and I don't have any choice in the matter unlike with Superannuation where I can choose not to contribute and only have my employer contribute.

As you can see, these contributions are significant (37% of my salary) and they are split into 3 accounts. Ordinary Account (for housing, insurance, investment and education), Special Account (for old age and investment in retirement-related financial products) and Medisave Account (for hospitalisation expenses and approved medical insurance) in the percentages of 23%, 6% and 8% respectively.

The interest rates earned on the OA, SA and MA are 2.5%, 4% and 4% respectively. However, there is an extra 1% interest paid on the first S$60,000 of my combined balances (with up to S$20,000 from my OA). This means I can earn up to 3.5%, 5% and 5% on my OA, SA and MA. The interest earned is credited at the end of each calendar year.

You should be able to observe the big difference in how my Superannuation fund and CPF balances grow. My Superannuation fund return in the aggressive investment option depends on the performance of stock markets while my CPF return depends on the setting of the interest rates. The former mainly relies on the effectiveness of the dollar-cost averaging approach to equities while the latter mainly relies on the interest rate environment.  

These overviews are necessary as an introduction to my next post on whether I prefer Superannuation or CPF as a retirement fund scheme. It should be an interesting comparison based on my experience and even I would like to know which one I prefer at the end of the post.

9 comments:

  1. Wah you have Superannuation on top of CPF...

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    1. I don't have as much Superannuation because I was only working for 4 years in Australia and didn't make any voluntary contributions. It's like a very small sum for retirement in Australia!

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  2. Interesting. How about the tax? Net net, median income, singapore or australia will have better quality of life?

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    1. Personal tax rates are definitely higher in Australia. However, I would think Australia offers a better quality of life on an average salary compared to Singapore.

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  3. The Australia Superannuation does take a bit to get used to. Lots of fees involved. Everyone wants a piece of your pie. For every $100 you/employer contribute into the superannuation account, the government takes 15%. The fund manager charges you an admin fee, performance fee, member fee, exit fee. Plus, the superannuation fund’s income is taxable.

    Plus, politicians often propose changing the laws around superannuation during election years. (Extra tax for high income earners etc)
    Also, Superannuation accounts can become inactive if the account does not receive a contribution in the past 5 years. Inactive superannuation accounts will be transferred to the Australian Tax Office. Those funds will be held by the Australia government.

    It is possible to withdraw the money in the superannuation fund. You can apply a Departing Australia Superannuation Payment through the Australian Tax Department. However, I think the funds are taxed at 38%.

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  4. You said that in Singapore, you pay 37% of CPF from your salary. 20 from your wage and 17 by your employer. Does your employer pay this 17 taking out from your wage as well? So let's say you earn $5,000 per month. You pay $1000 to CPF and the company deducts $850 from your wage? So in your payslip (excluding tax), you'll get 3150?

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    1. S$1,000 will be deducted from my gross monthly salary of S$5,000 and that will be my compulsory contribution (20%) to CPF. The employer compulsory contribution (17%) will be on top of the S$5,000 i.e. S$850 will be separately contributed by my employer. My net monthly salary that I receive in cash is S$4,000.

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