Should freelancers worry about CPF?
Being a freelancer sounds like the dream job for the free-spirited. Flexible hours, being your own boss, and setting terms on the types of projects you take. What’s more, freelancers get to pocket 100% of their paycheck, unlike traditional, formally employed nine-to-sixers who only receive 80% of their salary each month. But is not having mandatory CPF contributions really a good thing?
What exactly is CPF?
CPF stands for Central Provident Fund Board. For Singapore Citizens and Permanent Residents, CPF is a mandatory social security savings scheme funded by contributions from employers and employees. It consists of three accounts:
- Ordinary Account (OA) - primarily for retirement & housing
- Special Account (SA) - primarily for retirement
- MediSave Account - primarily for healthcare
In exchange for contributing 20% of their paycheck each month towards a retirement account, formally employed workers receive a 17% CPF top-up from their employers each month. The specifics of how much goes into which account varies depending on which CPF Allocation Rate age bracket you fall under, but what’s important to note is that this can accumulate into A LOT of money over time.
What is CPF so important?
For example, if you’re earning $50,000 a year (slightly less than $4,200 each month), 17% employer top-ups will give you an additional $8,500 per annum! All this money can go a long way in cushioning you from major life expenses such as housing, medical bills, and eventually, retirement. Plus, that 17% will only increase as workers climb up the corporate ladder and build their earning power.
And we haven’t talked about the interest rates that eligible individuals can receive on top of these contributions. Ordinary Accounts and Retirement Accounts as of 2023 sit at 2.5% and 4% respectively, the latter of which can help combat the alarmingly high inflation rates of 4.1% (as of September 2023). More importantly, these rates are slightly better than those offered by local savings accounts, which is estimated by personal finance blog Seedly to ‘realistically’ offer interest rates of between 0.88% to 3.85%.
How much CPF should freelancers in Singapore contribute?
Declaring income as a self-employed person
All freelancers and self-employed individuals are required by law to declare their Net Trade Income (NTI) with the CPF Board. If you have already done so with the Inland Revenue Authority of Singapore (IRAS), this step is not necessary as CPF will just retrieve your data from the IRAS.
Mandatory Medisave contributions
Freelancers who have declared their NTI will have to make MediSave contributions within 30 days after the Notice of Computation from the IRAS or Notice of Contribution from the CPF Board is issued. As for how much to contribute, an assessment will be made depending on your age and NTI, which can be conveniently calculated via the contribution calculator. For those without sufficient cash on hand, monthly instalments via GIRO is also possible.
Overflow into SA, OA, and RA
If the amount of money contributed towards your Medisave exceeds your Basic Healthcare Sum (BHS), excess funds will overflow into your other accounts based on the following circumstances:
- SA (for those aged below 55)
- RA (for those aged above 55 and do not have the Full Retirement Sum)
- OA (for those aged above 55 and have the Full Retirement Sum)
Self-employed individuals are encouraged to top up all three of their CPF accounts on top of their mandatory contributions.
Ways CPF can benefit freelancers financially
If you’re sitting there thinking, ‘this CPF thing seems to offer a lot of free housing/medical/retirement money that I’m leaving on the table’, you’re absolutely right! In fact, there are ways to get even more out of CPF, even as a freelancer or self-employed individual.
Grow and invest your savings safely
Stocks, crypto investments, and even record high savings account interest rates may potentially bring in better returns, but CPF is a safe, virtually foolproof way for anyone to receive almost guaranteed returns even in a market downturn — all without the prerequisite financial knowledge that most investments require.
Tax relief
Contributors can enjoy tax relief on $8,000 of their income when they make top ups to their Medisave Account. Additional tax relief on another $8,000 can be claimed if contributions are made towards loved ones without an annual income exceeding $4,000 a year or are handicapped. If that money is going towards the government anyway, it might as well be stored in a place where you can use for medical emergencies!
Singapore Citizens and Permanent Residents who made cash top-ups in 2022 under the CPF Retirement Sum Topping-Up Scheme (RSTU) would have enjoyed tax reliefs of up to $16,000 for this fiscal year. So be sure to make those contributions if you would like to legally pay less tax next year.
Fund your housing
As we know, housing prices have gone insane in Singapore. Contributing religiously to your CPF account can ensure that you’ll have a lump sum to offset the hefty payment when it’s finally your turn to collect those keys.
Housing payments are typically made through the OA, and can be used for the following items:
- Initial down payment
- Stamp duty
- Survey fees
- Transaction fees
- Lodgement fees
- Legal fees.
Additionally, if you’re taking a HDB concessionary loan, 15% of that can be paid through CPF. That amount goes up to 20% if you’re taking a bank loan instead. In the most recent update to CPF payment rules, home buyers can now reserve up to $20,000 in their CPF OA instead of emptying their accounts entirely. Whether that option is suitable for you will vary depending on your personal circumstances, but it’s always good to know what options you have on the table.
Insurance and savings for healthcare
While Medisave is a personal savings account to help tackle heavy medical expenses, Medishield Life is a health insurance scheme designed to help pay larger B2/C hospitalisation bills and selected outpatient treatment. Both Medisave and Medishield Life can be used for polyclinics, public hospitals, public healthcare institutions, approved private hospitals, and medical institutions.
For instance, through your Medisave maternity package, you can save up to $3,950 on pre-delivery expenses, delivery procedures, and hospital charges. Furthermore, it should also be noted that SEPs (Self-Employed People) with Net Trade Income over $6,000 must contribute to their MediSave Account (MA).
CPF schemes to invest in
Supplementary Retirement Scheme (SRS)
Through the Supplementary Retirement Scheme (SRS), individuals can make voluntary contributions to save for retirement, over and above their CPF savings. Not only are these contributions available for tax relief, investment returns are tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.
Contribute-As-You-Earn (CAYE)
The Contribute-As-You-Earn (CAYE) programme is a scheme aimed at helping self-employed persons (SEPs) contribute to their MediSave as and when they receive service payments. Through the auto-enrolment and auto MediSave payment, the programme provides a hassle-free way to create regular med-save contributions. By doing so, you have the chance to grow your MediSave savings faster with interest up to 5% per annum.
Finally, you can also transfer your Ordinary Account (OA) savings to your Special Account (SA) or Retirement Account (RA) to earn up to 5% interest rates.
Learn how to manage self-earned money the savvy way
Many freelancers opt for this career path despite the downsides because they see more earning potential venturing out on their own — and there’s nothing wrong with that. At Freelancer Nation, we’re here to empower all forms of work, whether it’s traditional, part-time, fully self-employed, entrepreneurial, or somewhere in-between.
If you’d like to hear more tips and tricks on how freelancers like yourself manage their finances, be sure to join the Freelancer Nation community to meet more like-minded individuals, or visit our Freelancing 101 Elearning platform and Freelance Creative Exchange Podcast. Finally, you may stay updated on the latest in freelancing by subscribing to our monthly newsletter.