CPF Life: Standard or Basic

Central Provident Fund (CPF) LIFE has been a fiercely debated topic for the past months. Since it is compulsory for most of us, I will focus on comparing the two plans (Basic and Standard) and determine their suitability (I will leave the judging of the CPF to the others). I gathered all my information from the CPF website and the "CPF LIFE Information Booklet" published by CPF Board.

First, there are 2 plans. With Standard, you get a higher monthly payout and lower bequest for your children; and with Basic, you get a lower payout and higher bequest for your children. Sounds simple enough? But there is more than meets the eye. *Transformer music*

Little Difference in Monthly Payout.

Based on the booklet's case study, the difference in monthly payout between Standard and Basic is less than $100. At the first glance, the Standard plan will leave your children with very little bequest when you are at age 75. In fact, the bequest of the Basic plan will still be at a strong of over $100,000! Therefore, even before calculating the actual value, I have a nagging feeling that Basic will be better off! But let's dive into the numbers first, using the CPF Life Payout Calculator.

	Computed as at 28 Jul 2014
The inputs that you have provided, •    Gender : Male •    Birth Date : 1 Jul 1959 •    Citizenship : Singaporean •    Retirement Account Balance : $100,000.00 •    Annual Value of Property : More than $13,000 •    Annual Assessable Income : More than $60,000

Plan	LIFE Standard	LIFE Basic
Description of the plan	This plan provides a higher monthly payout than LIFE Basic Plan, but leaves a lower bequest for your beneficiaries.	This plan provides a lower monthly payout than LIFE Standard Plan, but leaves a higher bequest for your beneficiaries.
Monthly payout1 from 65	$822 - $908	$737 - $815
Bequest left for your beneficiaries at selected ages2
Bequest at age 65	$108,505 - $109,894	$146,080 - $153,009
Bequest at age 75	$11,909 - $12,571	$105,914 - $112,305
Bequest at age 85	$0	$48,151 - $50,886
Bequest at age 95	$0	$0
1. The monthly payouts are based on the estimated amount that you set aside in your Retirement Account (RA) and the L-Bonus that you are estimated to be eligible for. The payout range is based on interest rates of between 3.75% and 4.25% and does not represent the lower and upper limits of the payout. The monthly payout may be adjusted every year to take into account factors such as CPF interest rate and mortality experience. 2. The bequest amount includes the estimated Retirement Account (RA) balance and annuity premium paid less annuity payouts that have been made under the plan. The estimated bequest amounts do not represent the upper and lower limits of the bequest amounts of the various plans. The interest assumptions used in above computations vary between 3.75% and 4.25%.

Big Difference in Total Value

Using an inflation rate of 4%, I discounted the future monthly payouts to their current value. The basic notion is that $100 in the future is worth less than $100 now due to inflation. Without any other information, I assumed that the monthly payout is constant (While it states that monthly payout is reviewed yearly based on life expectancy and investment returns; life expectancy is likely to increase as medicine advances and Singapore Govt Bonds interest rate remains rather constant, therefore the payout is likely to decrease in the future).

In Standard plan, you are receiving $908 each month till age 75, your total sum at present value (including the bequest) is $107,438.20;

In Basic plan, you are receiving $815 each month till age 75, your total sum at present value (including the bequest) is $162,055.75.

The Basic plan will give you ~50% more than the Standard plan when you add up both monthly payouts and bequest.

Once again, I am not sure why the Basic plan seems better than Standard. The only tell-tale sign I found was that Basic plan only deducts 10% from your RA at age 55, and deduct another 10% at age 65 while the Standard plan deducts 100% of your RA by age 65. This means ~80% of your RA will continue to earn the impressive interest of 4% under the Basic plan. The power of compounding interest is..... powerful! p.s. the first $60,000 of your RA earns 5%, ah gong rewards you for saving

Your Choice

After doing the math, I would most likely go for the Basic plan when my time comes. But even before I crunch the numbers, I was already inclined towards Basic plan. The reason is simple. I asked myself, "What do you want to achieve when your passing is near?".

And my answer is simple, "Leaving my children with the ability to do better than me."

I loved watching "Captain Planet" when I was young, and the Captain always said this at the end of each episode, "The power is yours". Indeed, the choice is yours too. Ultimately, CPF Life is one of the best schemes I could find around the whole world (I am not pro-PAP). If you look into those retirement income plans, you will realise the premium is much higher because the risk to undertake is high. No doubt, CPF Life is not perfect and its shortcomings (such as increasing the monthly payout according to inflation) need to be tweaked, it does give you a peace of mind when you know that a little pot of gold is waiting at end of the rainbow *leprechaun dancing*

I encourage everyone to find out more about CPF Life and CPF as a whole. It is your money afterall =D

Here are some useful links

General information, CPF Life Payout Calculator, CPF Life Booklet