At the National Day Rally on 18 August 2019, Prime Minister Lee Hsien Loong outlined plans on education, retirement age and climate change concerns- all of which will affect every one of us in different ways.
As the steward of your wealth, we have compiled a few key takeaways which may affect you in varying degrees. They are ranked according to the potential impact it would likely bring to you, together with our opinions of what have been proposed.
1. Official Retirement Age And Re-Employment Age To Be Gradually Raised.
The official retirement age will be raised to 65 years old in 2030. This will be done gradually. The re-employment age will also be raised to 70 years old in 2030.
2. There Is No Impact To CPF Withdrawal.
Despite #1, there will be no change to your cash flow as the mechanics of CPF Life’s operation remain status quo, thus not impacting your existing safe retirement income floor (SRIF).
3. There May Be An Impact To Supplementary Retirement Scheme (SRS). This Is Not Part Of The Announcement.
The penalty free withdrawal period for SRS account follows the statutory retirement age. When the retirement age changes, those whom have not yet opened their SRS account may be impacted.
4. Developments at Greater Southern Waterfront.
This is definitely good news for those who own properties in close proximity to this area. Some of your stocks would also benefit from the long-term development of Greater Southern Waterfront.
5. Protecting against climate change.
Climate change is probably the biggest challenge facing humankind. Singapore is especially vulnerable to rising sea levels as we are a low-lying island. To mitigate climate change, the government is seriously considering a few measures to tackle this problem.
6. More Pre-school Subsidies.
Pre-school education costs will come down for more families, as the government raises the monthly income ceiling for additional subsidies from $7,500 to $12,000 and increases the quantum of the subsidies. This means 30,000 more households will qualify for the subsidies starting next year. Government supported pre-schools would also increase from 50% to 80%.
7. Reduced University, Polytechnic Fees for Lower Income Students.
Greater percentage of subsidies will be given to bursaries, with University bursaries to increase from 50% to 75% of the tuition fee amount and Polytechnic bursaries to increase from 80% to 95% of the tuition fee amount. More bursaries would also be provided to NAFA, LASALLE and ITE students. Tuition fees for SIT and Singapore School Of Social Sciences would also be reduced by S$500.
Official Retirement Age And Re-Employment Age To Be Gradually Raised
Singapore will raise the retirement age and re-employment age to 65 and 70 respectively by 2030. These changes will be done in “gradual steps” with the retirement age, which is currently at 62, will go up to 63 in 2022 before being raised further to 65 by 2030.Similarly, the re-employment age of 67 will go up to 68 in three years’ time, and then to 70 by 2030.
You can refer to the table below for illustration.
So, who will be affected by this?
Here is why they are raising the retirement age- because there is a high probability that Singaporeans today will live past 85 years old. The government is worried that most Singaporeans would not have adequate wealth to spend and last in retirement.
There Is No Impact To CPF Retirement Withdrawal
It should be noted that changes in retirement age will not affect CPF withdrawal for now. Those who have reached 55 years old would still be able to withdraw their CPF OA and SA that is above the Full Retirement Sum, as well as obtain their CPF Life pay out at 65 years old.
The re-employment age would be beneficial to those who are currently still working. It provides policy security as it is now compulsory for their employers to offer them re-employment from age 62 onwards, up to the age of 70.
This would allow one to work longer and accumulate more wealth.
Continual employment is beneficial to a retiree in two ways:
- It adds on to their retirement funds, increasing what they can spend in the future
- By spending their earnings, it prevents early draw down of retirement funds
If you have a high savings rate, you can potentially lengthen your retirement by 2 years with every additional working year.
Read this article to learn how CPF LIFE can form the foundation of your retirement plan.
Changes To The CPF Contribution Rates
While there are no changes to the CPF Life withdrawal rules, the government would gradually raise the CPF Contribution rate.
You can refer to the following table:
In the existing CPF contribution, both the employer and employee’s contribution will step down gradually from 55 years old onwards.
Employers and employees will continue to contribute the full 37% from 55 to 60 years old, then step down to 26% and so on. The government have delayed the contribution rate reduction.
The impact here is that, for those who are still working, both their employers as well as themselves would be contributing more to their CPF.
As such, we would think that those who have chosen to delay their CPF Life pay out beyond the typical 65 years old may be able to receive more. This is especially beneficial for those who need more time to achieve the Full Retirement Sum, or even Basic Retirement Sum.
There May Be An Impact On SRS
Changing the retirement age may affect the penalty free withdrawal age if you decide to open an SRS account now and in the future.
The SRS account holder can withdraw his or her money after a certain age without any penalty. To withdraw SRS funds any earlier, there is a 5% penalty. The withdrawal amount would also be subjected to ordinary income tax charges.
Image from Investmentmoats
This penalty age follows the statutory retirement age. For those who have opened and contributed to their SRS account, this will not affect them at all.
For those who have yet to open the account, the penalty withdrawal age may be delayed and you would need to factor in these changes to the cash flow.
Development For The Greater Southern Waterfront
The Prime Minister gave more details on how the government intends to redevelop the waterfront into residential, commercial and recreational use.
Here are some of the plans announced:
- Pulau Brani, currently Brani Terminal, will be set aside for fun and recreation
- Rejuvenate Sentosa
- Redeveloped two decommissioned power stations in Pasir Panjang in a creative manner
- Improve the greenery by linking the surrounding green area in the southern waterfront
- Keppel club can be developed to build 9,000 residential units. The land lease will expire in 2 years. These can be private and public residential projects
- More commercial buildings will be developed in the region. Several large corporations such as Google, Cisco and Unilever already have offices near Labrador Park, the government will develop more office space around the Waterfront.
For residents who live nearby, they are likely to see their residential property retaining or appreciating in value, especially those staying at Telok Blangah and Redhill. The development will make their properties in higher demand with increased urban vibrancy as it integrates the “live, work, play” concept.
This is also delightful news if you are an investor holding Mapletree Commercial Trust. Mapletree Commercial Trust primarily owns a lot of commercial properties residing at the Greater Southern Waterfront.
Not to forget, an increase in residential and offices will greatly benefit Vivo City’s retail traffic. Outlook for rental growth is very much favourable. In most cases, having more commercial offices tend to also increase the competition for tenants, which we think this is a good sign due to the possibility of a growing dynamic community space in this part of Singapore.
These developments would also be beneficial to construction firms, engineering companies and cement suppliers that are listed on Singapore Stock Exchange, which have been in a slump due to a lack of meaningful projects with substantial value in recent years.
If you are currently invested in these companies, this may be good news for you. Do note that while there are greater potential opportunities due to the Greater Southern Waterfront development, there will be keen and intense competition to win these projects. It is far from given that these stocks will benefit from this development.
Stocks in these industries tend to be cyclical in nature. As an investor, you would have to stay vigilant in your assessment of the business.
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Protecting Against Climate Change
A major focus of the National Day Rally was the challenge posed by climate change and, in particular, rising sea levels to Singapore’s existence.
We are vulnerable to rising sea levels. “We have many older buildings. These cannot be lifted up, or transported to higher ground,” explained Mr Lee. “In fact, large parts of Singapore are low-lying, and we need to protect these low-lying areas as a whole.”
He outlined the steps that the government has already taken in recent years to prepare Singapore for the effects of climate change, and what it plans to do next:
- To protect individual buildings and developments – new developments are required to be built at least 4m above sea level, and this requirement is even higher for critical infrastructure – these solutions will not be enough
- Work will be prioritised for more “critical” areas such as the City-East Coast and Jurong Island segments
- Plans to build a second pump house at Marina Barrage. With rising sea levels, one pump to pump water to the sea may not be enough
- Polders, a Dutch innovation is seriously being considered
The government is prepared to commit S$100 billion or more, over the next 100 years, to invest in the engineering solutions needed to defend Singapore’s coastlines and protect its infrastructure and people from the effects of rising sea levels.
If we divide this mammoth sum against the duration cited by the Prime Minister, the amount is much more manageable at $1 to $2 billion a year.
This would inevitably increase the demands on the country’s economic budget. Depending on whether the government have already included this expenditure in their budget (which we think they already have), there is a potential shortfall in what can be provided from existing tax revenue and investment income from GIC. As a result, the government may call for greater taxes. At this point, however, there is little indication of such narrative as the Prime Minister has not made any remarks on whether these spending are sustainable or would require additional funding.
As a small island city, climate change is something that we should take seriously. It would affect everyone’s plan on whether Singapore is still a conducive place to raise their family. This is also a rather important piece of information for people who have invested most of their net wealth in physical properties in the country.
At Providend, as our portfolios are globally diversified, it guards against the situation where a geographical event can have a big impact on the client’s net wealth.
As an investor, do you really understand the risk-return trade off? Find out more here.
More Pre-school Subsidies
Prime Minister announced that the country would more than double its spending on early-childhood education, from about S$1 billion a year today, in order to raise the share of preschool places that are government-supported from just over 50 per cent to 80 per cent.
In addition, pre-school education costs will also become more affordable for more families, as the government raises the monthly income ceiling for additional subsidies from $7,500 to $12,000 and increases the quantum of the subsidies. This means 30,000 more households will qualify for the subsidies starting next year.
Middle-income families would stand to benefit most from this policy change.
Reduced University, Polytechnic Fees For Lower-Income Students
The Prime Minister also announced a few measures aimed at helping lower income students, namely:
- Bursaries for university courses to increase from up to 50 per cent of fees, to up to 75 per cent
- Bursaries for polytechnic diploma programmes to increase from up to 80 per cent of fees, to up to 95 per cent
- Increased bursaries for students at the Institute of Technical Education (ITE), Nanyang Academy of Fine Arts and LASALLE College of the Art
Students at Singapore Institute of Technology (SIT) and Singapore University of Social Sciences will also pay lower school fees from around the current S$8,000 to S$7,500.
Government Bursaries will be increased for University and Polytechnic Bursaries in the follow ways:
- 6 in 10 students are eligible for government bursaries
- Diploma and degree students at ITE, NAFA and LASALLE are covered as well
- Bursaries for medical courses will be enhanced more
In addition, Prime Minister have highlighted that for low income but eligible students who wish to take up local medical studies, they could be subsidized to pay just S$5,000 a year in tuition fee. This is a large reduction.
If you are saving for your children’s tertiary education, this is something you should be aware.
This is an original article written by Kyith Ng, Senior Solutions Specialist at Providend, Singapore’s Fee-only Retirement Financial Adviser.
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