New CPF rule for home sellers aged 55 and above

Source : Straits Times - 19 Sep 2008

It will address shortfalls in their Minimum Sum to build up retirement funds

A LITTLE-KNOWN rule change will kick in next year regarding how much money property owners must return to their Central Provident Fund (CPF) accounts when they sell their homes.

The new rule, which will address shortfalls in an individual’s Minimum Sum, is aimed at helping CPF members build up their retirement funds.

Currently, home owners aged 55 and above do not have to refund their CPF accounts when they sell their properties, unless they have pledged their homes to meet their Minimum Sum requirement. In that case, they will pay back to the CPF the amount they have pledged their home for - with interest.

But from Jan 1, all home sellers over 55 who use CPF funds to pay for their properties will have to pay back this money - plus interest - up to their Minimum Sum requirement.

If they have withdrawn less CPF money than the shortfall in their Minimum Sum, they will need to refund only what they have withdrawn, including interest, currently at 2.5 per cent a year. They do not need to make up for the rest of the shortfall in cash.

Home sellers who do not receive enough from the property sale to refund the Minimum Sum deficiency will not be required to top up the shortfall, as long as the property is sold at market value.

To see how the rule change works, consider the case of Mr Tan, a 58-year-old home owner whose Minimum Sum requirement is $90,000.

He has only $30,000 in his retirement account, so his shortfall is $60,000. To help make up for this difference, he has pledged his property for $45,000.

If Mr Tan sells his property this year, he will pay back to the CPF what he has pledged the property for, plus interest, which works out to, say, $51,000.

But if he sells his property next year under the new rule, he will have to pay back the amount he has withdrawn, capped at his Minimum Sum deficiency - that is, $60,000.

This rule change, which was first announced during the Budget debate last year, will not affect those under the age of 55, or who turned 55 before July 1, 1995.

While home sellers under 55 have to refund any CPF money used to buy their properties, this rule has not been enforced uniformly for those above 55, said Manpower Minister Ng Eng Hen last year.

‘Specifically, we have only recovered the property pledge from them and not the shortfalls for the cash portion of the Minimum Sum,’ said Dr Ng when he introduced the rule change in March last year.

The Minimum Sum that applies to any individual CPF member depends on the year he or she turns 55. Those turning 55 between July 1 this year and June 30 next year will have a Minimum Sum of $106,000, for instance.

Generally, the impact of this rule change is likely to be small, said Mr Christopher Tan, chief executive of independent private wealth firm Providend.

‘To begin with, most people would have pledged their house as part of the Minimum Sum because they want to take out more money at 55,’ he said.

‘When they sell their house, they would have to put back that money anyway. With the new rule, you refund your CPF account only up to the Minimum Sum, which is, in all likelihood, less than what you withdrew from the CPF to pay for it.’

Limited Impact

With the new rule, you only refund your CPF account up to the Minimum Sum, which is, in all likelihood, less than what you withdrew from the CPF to pay for it.’ - Mr Christopher Tan, chief executive of independent private wealth firm Providend, saying the impact of the rule is likely to be small