If you’re a freelancer or self-employed person, you may be glad to be free of the CPF contributions of 20% from your salary, and the 17% that the employer needs to pay.
Don’t smile. Yet.
It may not be all that rosy. Not contributing to your CPF may have averse effects on your credit score, which I explain later.
I remember the first time I contributed to my own CPF, as a self-employed. In December 2021 and January 2022, I contributed $406 per month.
That was probably the hardest thing I did. Why did I do it?
I wanted to get paid by the army. And the army only recognised CPF contributions as proof of employment. The hours spent photocopying piece by piece the cheques I got, the invoices I sent out, eventually resulted in a paltry $198 from NS for my reservist.
Today, we examine the question.
Should you contribute to your CPF if you’re self-employed?
The answer is yes, but it depends on 3 different factors.
Why contribute to your CPF?
Firstly, you have obligations, even if you’re self-employed.
The Medisave obligations
Self-employed individuals who earn an annual net trade income of $6,000 and more are required to contribute to their MediSave Account (MA).
MediSave is a national savings scheme which helps CPF members save for future medical expenses, especially after retirement. The monthly contribution rate varies from 6% to 8% depending on your income, with a cap at $5,760.
You have to calculate the amount you’re supposed to contribute, and then contribute it.
- Declare with IRAS
- If you haven’t been issued with the Notice of Assessment, declare it with CPF here instead.
- Use the contribution calculator.
- Contribute via GIRO or Ecashier.
You won’t get credit
Without a healthy CPF contribution history, you can kiss goodbye to potential loans, credit cards, and even buying a house.
Yes, it’s that serious.
Not contributing since January 2022 resulted in me being rejected from two different credit card applications with UOB One and the Standard Chartered Smart Credit Card (turns out they were actually quite smart).
I thought the CPF didn’t matter, since this year, IRAS (the tax authority of Singapore) had assessed the fulltime job I had had back then. I thought the high amount would put me in good standing with banks.
Turns out, not to be.
Without a CPF contribution, it appears that your credit history cannot be established, making it difficult for bank to issue credit, even if you say you’re an entrepreneur.
It’s not just me.
I’ve heard of my friends who are doctors, who are returning back to the army, to serve the 1.5 years that they deferred, being turned down from banks or HDB for housing loans.
Because NS doesn’t give CPF, and if you’ve no CPF in Singapore, you’re screwed.
These are doctors. Mind you. Doctors. They would be earning a lot of money, but because of their NS obligation, they are taking a 1.5 year hit to their incomes.
CPF is that important.
That said, let’s examine the 3 factors that will help you make a better decision about whether you should contribute to your CPF.
How much cash on hand do you have?
If you’re self-employed, you need to make sure of 2 things.
- You have 3 months of operating expenses on hand
- You have 6 months of reserves in your hand
You quitted your job for a reason. Freedom, flexibility, whatever.
You probably don’t want to go back to it.
Keeping a healthy amount in reserves will help you make sure that you don’t go crawling to your boss, begging for a job.
Cash on hand is king.
That will determine how much you get to contribute to your CPF. My advice is that if you don’t have these 2 baselines, you shouldn’t even think about contributing to your CPF.
How much are you earning per month?
If you’re earning $1000 a month, contributing the 20% a month on your own is a big sum.
It may not be worth it.
Let me give you an example from my own life.
Building a business is hard. That means that the cash to spend is extremely important for the lean months, when there’s not as much business.
But it also means that I haven’t been regularly contributing to my CPF since January 2022.
For me, how I make sense of this is that cash on hand is more important than locking away the cash in the CPF. I like to see it as ensuring business survival, before I ensure my own personal survival.
I know this sounds dumb. But when you have people to feed, salaries to pay, and you realise that the money you’re earning is paying for the food on people’s table, that’s when shit gets real.
But if you’re at a healthy, regular $4500 a month, (the median salary of Singaporeans), then you should consider contributing.
What life stage are you at?
Here, you need to know your life plans. As boring as that sounds.
If you’re getting married, you need to establish a CPF history so that the banks will lend you money, and not think that you’re just a fraud there to make off with their money.
I suggest you contribute for a year at the CPF contribution rate of 20%, at the average median salary of $4500, if you want to be safe.
That means you should be automatically deducting via GIRO a $900 every month, that goes straight into your CPF.
Make it no fuss. If you’re set up as a Private Limited Company, then contribute to your CPF via the CPF EZPAY. I would recommend that you set up an Electronic Standing Instruction so that you don’t waste time remembering to transfer.
But if you’re single, and marriage is not on the horizon, then continue to work to increase your income each month.
CPF is the way the government protects you
For everything we say about CPF locking away our money, you would be hard pressed to find a savings account that gives you 5% a year in your Retirement Account.
But if you’re a self-employed person, it can be difficult to balance between your future needs, and your current business needs.
Striking a balance requires you to first settle your current needs, before you think about the future.
You may end up in future a little poorer, but at least you lived a little whilst you were younger.