Sunday, May 12, 2013

What if you cannot hit your CPF minimum sum by age 55

Earlier last week, it was announced that the CPF minimum sum will be raised to $148,000 in Jul 2013. A few friends I spoke to were concerned with the rising CPF minimum sum and asked me how will happen if they cannot hit the minimum sum target.

Based on the CPF website...
"If you are unable to set aside your full Minimum Sum in cash, your property, bought with your CPF savings, will be automatically pledged for up to half of your Minimum Sum."

So what does this "pledging" mean?
The CPF website did not display much information on this "pledging". However, based on wikipedia (http://en.wikipedia.org/wiki/Pledge_(law)):
"...... A pledge of personal property is known as a pawn......"

I believe you can think of it as "pawning your property" to CPF board so that your CPF balances are increased to ensure that you have a higher CPF LIFE payout.

How much can you pledge?
Source: CPF website on minimum sum
You can pledge up to 50% of the prevailing minimum sum. The amount also depend on the following factors:
  • HDB’s quarterly average median resale prices for HDB flats or valuation price for private properties;
  • Outstanding housing loan amount (including non-housing loan for private properties);
  • Co-owner’s CPF usage (for joint-ownership cases); and
  • Your share of the property.
Based on the examples listed, what I can gather is as follows:
step 1: calculate the residual value of the property
residual value of property = HDB's average valuation price - outstanding HDB loan

Step 2: compute the pledging amount based on the following:
If you contributed more than 50% of the loan via CPF, you can pledge up to
a) 50% of the residual value OR
b) 50% of prevailing minimum sum
which ever that is lower.

If you contributed less than 50% of the loan via CPF, you can pledge up to
a) the percentage of the residual value which you contributed
b) 50% of prevailing minimum sum
which ever that is lower.
For example, if the residual value is 100k and you contributed 20% of the loan via CPF, you can pledge up to 20k.

Selling your pledged property
Based on CPF website:
"when the property is sold or otherwise disposed of, you need to refund the MS deficiency, or the principal CPF withdrawn for the property plus the accrued interest, whichever is lower. The MS deficiency is the CPF MS applicable to you when you turn 55 less the balance in your Retirement Account (excluding the interest earned)."
How i see this: Even though you pawned your property, you are still the owner. If you sell your property, you need to pay back the "pawn shop" with interest. 

Other thoughts
A typical pawning has "a certain contractual period of time the pawner may redeem it for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker's policies. If the loan is not paid (or extended, if applicable) within the time period, the pawned item will be offered for sale by the pawnbroker."

So, my next question is how long is this contractual period before CPF board can step in and claim the pledged property?

Using a typical pawning concept, I believe you can still
a) Transfer the property to your children and let them redeem the property. Though I am not sure if they can use their CPF balances to redeem the property.
b) Redeem the property on your own with cash
However, if there is an intention to redeem the property, please do it as soon as you can. The accured interest should be based on the interest rates paid on the retirement account (i.e. 4% per annum, compounded).

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