Here’s how to give your child a financial head start

If you’ve only got a minute:

• Topping up your child’s CPF is an effective way to give your child a financial head start by earning the risk-free interest from CPF.
• There are 3 main ways to top up your child’s CPF accounts – via the Retirement Sum topping up scheme, Medisave top-up or voluntary cash contributions.
• It is important to know the objective of topping up your child’s CPF accounts as the funds from different accounts has its specific usage.

So your bundle of joy has arrived, and your exciting journey as parents has begun. In between tracking milestones, you will find yourself thinking of the future. Will he be going to university? What if there is a hefty medical bill?

It's natural to worry about your finances. After all, Singapore is the world’s most expensive city to live in. According to National University of Singapore (NUS) economists in 2018, the cost to raise a child in Singapore is estimated to be between S$280,000 and S$560,000, depending on household income.¹

University fees, for instance, are only expected to increase with inflation. In 2008, tuition fees for a business degree at NUS cost S$6,540 a year, while a similar degree at Nanyang Technological University would set you back by $6,360 annually. In 2023, this had risen to S$9,650² and S$9,450³ respectively. That’s an increase of about 48% over the last 15 years, or 3.2% per year.

Furthermore, hospital bills have grown by 5% annually in public hospitals, and by 7% annually in private hospitals over the last few years, according to Health Minister Ong Ye Kung during his ministry’s budget debate in parliament in March.⁴

Of course, you can’t put a price on the joys of watching your child grow up, but you can plan and manage your finances to make sure that monetary concerns do not dampen that happiness. And one way is by topping up your child’s Central Provident Fund (CPF) account which, unknown to many, can be done right from birth.

3 ways you can top your child’s CPF accounts

Method 1: Retirement Sum Topping-up Scheme

While this scheme is typically tapped on to save for your own retirement, you can also use it to top up your child’s Special Account (SA). This method is most suited for those with large sums of idle cash as the maximum limit for such top-ups stands at the current Full Retirement Sum of S$205,800.

CPF members aged 55 and below get to enjoy the following interest rates from 1 April 2024 to 30 June 2024:

OA: 2.5% per annum

SA: 4.05% per annum

MA: 4.05% per annum

Furthermore, savings of combined CPF balances below S$60,000 (capped at S$20,000 for OA) will accrue an extra 1% interest.

With a monthly top-up of S$200, assuming the interest rate remains steady at 5% for the first S$60,000 and 4% for the remaining funds, your child can expect a small fortune of around S$90,000* in their SA at 21 years old, which he can grow further once he starts working.

Method 2: Direct MediSave Top-Up

If your concern is rising medical costs, then this option may be for you. You can top up directly to their MediSave account (MA), which can be used for medical needs and private Integrated Shield Plan premiums. If you are worried that you will rack up medical bills in your old age, then this option would provide an additional safety net as your child will be able to use the funds to cover your expenditure too.

Method 3: Voluntary Cash Contribution

The best way to fund your child’s tertiary education and other big ticket expenditure down the road like housing would be to top up their Ordinary Account (OA). Voluntary Cash Contribution allows you to make small and regular contributions, though you can’t choose to top up only their OA as the amount contributed will be distributed to their MA and SA as well. The allocation rates are as follows:

OA: 0.6217

SA: 0.1621

MA: 0.2162

Assuming again a monthly contribution of $200, with no change to the prevailing interest rates, your child can expect to have around S$41,000* in his OA, S$14,000* in his SA and S$19,000* in his MA when he turns 21 years old.

What are the pros and cons?

Pros: Apart from helping your child save for the future, topping up their CPF accounts allows them to earn an attractive interest which is risk-free. Contributing to their CPF accounts over a long period of time also allows them to hedge against inflation.

Cons: One big disadvantage is that once contributed, your money will be locked in and can be used only for specific purposes like paying for education and medical needs. This also means losing the chance to invest in other financial products.

You will also not be entitled to any tax relief for contributing to your child’s CPF accounts. And while CPF interest rates have been consistent for a long time, they are reviewed on a regular basis and could be adjusted up or down.

How else can you save for your child?

While topping up your child’s CPF is a good way to set your child up for a comfortable future, it is not the only way. The more common alternatives include maximising their Child Development Account.

Under the Enhanced Baby Bonus Scheme, which came into effect for children born from 14 February 2023, parents receive cash gifts of S$11,000 each for their first and second children, and S$13,000 each for their third and subsequent children. The government will also match the amount you saved in your child’s CDA, dollar for dollar, up to a certain cap.

If the funds are not used by the time your child turns 13, the funds in the CDA will be transferred to the Post-Secondary Education Account (PSEA), where they earn a fixed interest rate of 2.5%. And if there are still used funds in their PSEA when they turn 31, it will be automatically closed in the middle of that year and the money transferred to their CPF OA.

There are also the usual endowment and education savings insurance plans that the more conservative investors can consider. More savvy investors can look to grow their children’s monies through stocks, exchange-traded funds, and other financial products that are more volatile but have the potential to offer higher returns.

Ultimately, choosing the right approach will depend on your financial circumstances and risk appetite. But DB If not, your child would need to shoulder your expenses too, which defeats the purpose of wanting to give them a head start in the first place.

*Please note that calculations are based on yearly compounded interests and are only estimates

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Sources:

¹ https://www.moneyfm893.sg/whats-on/singapore-mum-builds-six-figure-business-with-just-2000-how

² https://www.nus.edu.sg/registrar/docs/info/administrative-policies-procedures/ugtuitioncurrent.pdf

³ https://www.ntu.edu.sg/docs/default-source/onestop@sac/tuition-fees-ft_ug_2023_feb2024.3.pdf?sfvrsn=c407f899_3

⁴ https://www.channelnewsasia.com/singapore/medishield-life-health-insurance-subsidies-community-hospitals-moh-4174391

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.