Dodging your CPF contributions not only helps unscrupulous employers, it can end up costing you a fortune.
Some Singaporeans have found ways to avoid declaring their income, in order to avoid CPF contributions. Apart from being illegal (unless you’re self-employed), refusing to be part of the CPF “system” can cost you more money than you think.
Hiding your money from CPF can mean you’re just cheating yourself; here's why.
How do CPF Contributions Work?
First, here's a primer on how the CPF contributions work.
All employees earning more than S$500 in a month have to contribute 20 per cent of their monthly income to CPF. On top of that, their employer has to contribute an additional 17 per cent. So if you’re an employee earning S$2,500 per month, you would have to contribute S$500 per month. In addition, your employer will have to put in an added S$425 per month.
Self-employed people are a different matter. Under the Self-Employed Scheme, you are only required to contribute to Medisave (use this calculator to find out how much). The amount is determined by a combination of your age, and net earnings. Any other contributions are voluntary.
When you make CPF contributions, the money is allocated between your Ordinary Account (OA), Special Account (SA), and Medisave Account (MA).
The base interest rates for your OA is 2.5%, and 4% for your SA and MA accounts. However, you will receive an additional 1% interest on the first S$60,000 across all 3 combined accounts.
In other words:
CPF Interest Rates for OA:
CPF Interest Rates for SA and MA:
(Btw the above illustrations applies only for those under 55 years old. But for the purposes of this article, let's not worry about that.)
Your CPF monies are allocated among your accounts based on your age.
It may seem better not to contribute, as you’ll have more cash in your bank account every month. But in reality, hiding your money from CPF can mean you lose a small fortune.
Hiding Your Income Could Mean Helping an Unethical Employer (to Rip You Off)
Say someone wants to hire you, but they don’t want to put you on their payroll. They strike up a “special” deal with you: they will pay you S$2,500 a month, without giving you an official employment contract.
As the government doesn’t know about the deal, you’ll get to keep the whole S$2,500 - no need to pay S$500 per month into your CPF. But how much does this S$500 a month really cost you, by the end of the year?
Remember that your employer is also not contributing the additional 17 per cent. This means you effectively lose S$425 a month. By the end of one working year, refusing to contribute to CPF would already cost you a whopping S$5,100.
What’s worse is that the loss compounds to truly eye-popping amounts, after the first 10 years of your working life.
Assume that the added S$5,100 a year would otherwise go toward your CPF SA, which grows at a minimum of 4% per annum, and is meant for your retirement.
Over the course of 10 years, S$5,100 compounded at 4% per annum would come to approximately S$62,787. That’s a total accrued interest of almost S$11,790, which you’ve allowed your shady employer to steal from you.
Don’t forget that, besides the loss of your CPF monies, being illegally employed means you have no proper contract. If your employer doesn’t pay you on time - or flat out refuses to pay you - there’s no way the Ministry of Manpower can protect you.
And if you are caught making such an arrangement, you can expect a hefty fine, not least from the Inland Revenue Authority of Singapore (IRAS) for back taxes.
If You’re Self-employed, Think Twice About Dodging Your Medisave Contributions
While self-employed people don’t have to contribute to their CPF OA or SA, they must still contribute to their MA (see above). Now you may be tempted to under declare your income, or not declare it at all - especially if you’re face irregular cash flows.
But there are two things to bear mind. The first is that you’re doing something illegal - expect big fines if the government ever finds out.
The second is that your MA grows at a guaranteed 4% per annum - that’s a deal that’s hard to find among regular financial products (most endowment plans don’t have guaranteed returns that come anywhere close).
Your MA is also used to pay for insurance, such as Medishield, or Integrated Shield Plans. As health insurance is something you need to buy anyway, is it really worth lying to avoid MA contributions?
Don’t Shortchange Yourself Just to Dodge the CPF
Hopefully by now, you understand that it’s not worth losing so much money, just to gain access to an extra 20% of your income that you should be saving anyway.
If you feel tempted to play with fire and hide your income, remember the downside is probably bigger than the upside.
Read This Next:
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A Complete Guide To CPF In Singapore (2024)
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