CPF LIFE Explained: What They Don’t Tell You And What’s Actually True

Daniel Lee
31 minutes ago
8 min read

The Central Provident Fund (CPF) LIFE scheme is a cornerstone of Singapore’s retirement framework, designed with a clear and singular purpose — to provide a guaranteed stream of income for life, eliminating the financial uncertainty that comes with outliving one’s savings.

Despite its critical role, CPF LIFE is often misunderstood, with misconceptions fuelled by hearsay, half-truths, and commentary from those biased against the system.

This article aims to cut through the noise by offering a clear, fact-based explanation of how CPF LIFE works — from the creation of the Retirement Account at age 55, to the use of your savings as premiums at 65, and finally, to the mechanics behind your lifelong payouts.

Beyond simply explaining the system, we will also compare CPF LIFE to a range of private annuity alternatives available in the market, highlighting their differences in payout structures, returns, and objectives.

By the end, readers will see CPF LIFE for what it is: a national insurance scheme built to ensure no Singaporean or Permanent Resident runs out of retirement income.

Whether you agree with its structure or not, having a clear understanding of its design is the first step to making informed retirement decisions — without being swayed by myths or uneducated speculation.

The article is broken down into the following sections:

Making Sense Of CPF Post 55
Understanding The IRR of CPF Life
CPF Life vs Private Annuities
Bringing It Together

1: Making Sense Of CPF Post 55

Before we begin with the analysis, let us do a quick run-through on how CPF life works and what would happen to the funds within your retirement account upon its creation at the age of 55 years old.

At 55 years old: creation of the Retirement Account
- Upon turning 55 years old, CPF combines your Special Account (SA) and Ordinary Account (OA) savings to form your Retirement Account (RA), up to the Full Retirement Sum (FRS)
- Any excess funds beyond the Full Retirement Sum will be transferred to the Ordinary Account which will be withdrawable. The Special Account then closes.
From 55 to 64 years old
- The funds in your retirement account continue to grow at 4% per year – same as the SA - while the funds in your ordinary account continue to grow at 2.5% per year.
At 65 years old
- You may start CPF LIFE payouts any time between the ages 65 to 70. Delaying payouts leads to about 7% higher payouts per year deferred up to ~35% if deferred to age 70.
- RA funds are used to purchase a lifelong annuity under one of three plans:
  - Standard Plan: Full RA used as the annuity payout, providing higher starting payouts and lower bequests.
  - Basic Plan: A smaller portion (10-20%) of your RA is used as the annuity premium. You will receive monthly payouts from your RA until age 90, after which you will receive payouts from the accumulated CPF LIFE Lifelong Income Fund. This provides a lower starting payout but a higher bequest.
  - Escalating Plan: Full RA used as the annuity premium; payouts start lower but increase by 2% annually to offset inflation.

Any unused funds within the retirement account will continue to enjoy the 4% return rate. For this article, we’ll be using the CPF Life Standard Plan as the instrument for our analysis.

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2: Understanding The IRR Of CPF Life

When we examine CPF LIFE’s Standard Plan across the three retirement sums — Basic Retirement Sum (BRS), Full Retirement Sum (FRS), and Enhanced Retirement Sum (ERS) — the Internal Rate of Return (IRR) paints an interesting picture of how the scheme works in practice.

1. The IRR Drops Initially upon the commencement of the plan, then rises

The IRR declines immediately upon joining the plan at age 65, then gradually climbs the longer you live past the average life expectancy.

This happens because CPF LIFE is designed as a national longevity insurance scheme where premiums from those who pass away earlier help sustain payouts for those who live longer. As your payout duration extends, the value you receive from the plan increases, therefore increasing the IRR over time.

2. The 4% Benchmark and Beyond

The plan is structured to deliver around a 4% IRR if you live to average life expectancy (85). If you outlive this age, your IRR can rise well above 4%, with some cases exceeding 5% by age 100 or beyond.

This reinforces CPF LIFE’s role as a hedge against the financial risk of outliving your savings and not as a vehicle for users to maximise their investment returns in the short term.

3. Lower Premiums Can Mean Higher Returns

From the table, we can also see that the IRR is higher for BRS compared to FRS or ERS.

This is a deliberate redistribution mechanism within CPF LIFE - ensuring that members with smaller retirement savings (often less well-off) benefit proportionately more than those with larger sums.

While such redistribution may be undesirable in private investment products, it aligns with CPF LIFE’s social protection mandate.

4. Debunking the “CPF LIFE Doesn’t Pay 4% Interest” Myth

A common misconception of CPF Life is:

“CPF LIFE does not pay the 4% interest we’re entitled to — so the government must be pocketing the difference.”

This stems from a misunderstanding of annuity mechanics.

Unlike fixed deposits or bonds, CPF LIFE does not pay “interest” into your principal. Instead, the interest generated is pooled together to:

Contribute to the payout of your CPF Life payout once your principal is depleted, which will happen around 13 - 15 years after the payout starts.
Offset the payout of policyholders who outlive the average life expectancy as the plan is designed to provide lifetime payouts.

If you live to age 85, your IRR will still average around 4%, matching the long-term returns of your Special or Retirement Account. If you live longer, your effective return exceeds 4% - something fixed-income products can’t replicate without taking market risk.

Having this understanding, the next question in the minds of the majority would be:

“How does CPF Life Plan compare with other Private Annuities in the market?”

We’ll explore the question in our next section.

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3: CPF Life vs Private Annuities

In this section, we compare the CPF LIFE Standard Plan against several types of private annuities available in the market today. The goal is to evaluate how each option performs in terms of Internal Rate of Return (IRR) and monthly payouts, based on realistic assumptions.

Before we get into the findings, let us look at the analysis setting and the types of private annuities in the market today.

Analysis Settings

To ensure a fair, apples-to-apples comparison, the following parameters were applied to match the timeline of the cash flow between CPF and Private Annuities:

Comparable Initial Capital: The invested capital at age 55 was matched as closely as possible to the Full Retirement Sum (FRS) at that age.
Payout Start Age at 65: All plans initiate payouts at age 65, with an accumulation period from the age of 55 to 64 if available.
Future Value Adjustment: If there are limitations to the age of policy inception or accumulation duration, I’ll adjust the initial capital to match the future value of FRS to ensure that there is no discrepancy in the value of the invested capital.

Types of Annuities

Before we look at the results, let’s briefly define the annuity types:

Drawdown Annuities (Limited Duration)
- Pays out both principal and returns over a fixed number of years.
- Death/surrender value approaches zero as the plan nears maturity.
Drawdown Annuities (Lifetime Duration)
- Pays out both principal and returns over your lifetime.
- Death/surrender value is near zero once total payouts exceed the principal.
Passive Income Annuities (Lifetime Duration)
- Pays out the returns over your lifetime while preserving the principal.
- Principal may grow at a fixed/variable rate, potentially increasing legacy value.

With the technicalities out of the way, we can now examine the findings of the analysis.

Findings from the Comparison

1. Drawdown Annuities Outperform Early On - But CPF LIFE Wins in Longevity

From both IRR and monthly payout metrics, drawdown annuities outperform CPF LIFE if the payout duration is within life expectancy.

However, if payouts extend beyond average life expectancy (85 years), CPF LIFE overtakes drawdown annuities in both IRR and monthly payouts.

This is expected — CPF LIFE’s strength lies in combating longevity risk, something drawdown annuities cannot address.

2. Lifetime Annuities Offer Capital Preservation at the Expense of Payouts

With an initial capital of $213,000 at 55 (or $315,292 at 65), CPF LIFE offers significantly higher monthly payouts than lifetime annuities.

This finding is also to be expected given that the capital of lifetime annuities is preserved while the capital of CPF life is drawn down to 0. As such, policyholders of lifetime annuities are sacrificing a portion of the monthly payout in return for the capital preservation ability which can either be redirected to other investments if an opportunity arises (liquidity via surrendering) or passed on to future generations (legacy planning via death benefit).

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4: Bringing It All Together

When viewed holistically, CPF LIFE is a well-engineered national annuity scheme that serves its intended purpose exceptionally well — to provide a lifetime income stream that eliminates the financial uncertainty of outliving one’s savings.

Its design also incorporates a social redistribution element, where those who are more well-to-do indirectly support those with fewer resources. While this may be undesirable in private investment products, it is an essential feature in a national safety net that prioritises societal stability and retirement adequacy for all.

The mechanics of CPF LIFE — from the pooling of longevity risk to the gradual drawdown of capital — ensure that most participants receive an Internal Rate of Return (IRR) comparable to the Special and Retirement Accounts if they live to at least the average life expectancy. For those who outlive the average, the returns can even exceed this benchmark, a testament to the plan’s effectiveness in mitigating longevity risk.

That said, my only critique of CPF LIFE lies in its lack of flexibility in choosing an earlier payout age, such as 55 or 60.

While starting earlier would naturally reduce the monthly payout, this option could benefit more financially secure individuals who are willing and able to commit a higher premium amount upfront to match or exceed the standard payout, while aligning the income start date with their desired early retirement age.

Such a feature would add personalisation to an otherwise standardised system, without compromising the plan’s core objective of lifetime income security. That said, there are limitations to how much they can do to design a system that seeks to benefit the masses.

CPF plays a crucial role in retirement planning, but given its inherent inflexibility in policy settings, it’s essential to understand how to integrate it effectively into your overall financial strategy instead of viewing it in isolation.

If you want clarity on how CPF LIFE fits into your personal retirement plan and how to build a strategy that works for you, let's have a conversation: