Freelancing and being a gig worker seems relaxing and fuss-free until you face financial planning, retirement and savings. And suddenly, it does not seem that easy after all.
Being a freelancer, you will need to manage your finances well and this includes your CPF contributions since you are on your own.
Since you are a freelancer, that means you are a self-employed person. Question is, how do you planning for your retirement and healthcare needs, especially with the absence of a Medisave contribution from an employer?
What is CPF?
Most of us should already know what Central Provident Fund (CPF) is but let’s do a quick recap. It is an obligatory social security system that is contributed by both employers and employees.
According to the Ministry of Manpower (MOM) website, “The CPF is a key pillar of Singapore’s social security system, and serves to meet our retirement, housing and healthcare needs.”
The purpose of CPF is to primarily help you plan for retirement early, which will help provide for your needs when you reach retirement age. The government also provides additional contributions to supplement your CPF savings.
Your CPF contributions go to 3 different accounts; Ordinary Account, Special Account, and Medisave Account. When you reach 55 years old, the savings in your Ordinary and Special Accounts will be transferred to your Retirement Account which will form your retirement sum.
What about freelancers?
Under the Self-Employed Scheme, freelancers do need to contribute to their CPF but mainly to their Medisave Account. As long as your Net Trade Income (NTI) is more than $6,000 per year, it is compulsory to contribute to your Medisave account.
Unlike salaried employees, freelancers do not receive the extra top-up from employers and will have to contribute the mandatory 17% contribution personally. Contributions towards the other 2 accounts are optional (though, it is good to have!)
Extra CPF top-up – should I?
We have established the fact that making contributions to your Medisave Account as a freelancer earning more than $6,000 is compulsory. Then, should you be making additional contributions next?
One con of being a freelancer has no safety net or savings to support you as you age. Thus, it is highly recommended to make extra top-ups to your CPF!
- You can use your CPF contributions to reduce your income taxes.
Under the CPF Relief for Self-Employed Scheme, you can enjoy tax relief on your contributions based on your annual NTI. The maximum tax deduction is at 37% of your assessable income or up to the CPF annual limit of $37,740, whichever is lower.
On the other hand, contributions to the Supplementary Retirement Scheme (SRS) are also eligible for tax relief. Under this voluntary scheme that encourages retirement savings, you can get additional tax relief in the preceding year.
- CPF savings grow faster with a high guaranteed interest.
The current CPF interest rates for your Ordinary Account guarantee you a minimum of 2.5% interest per year while your Savings and Medisave accounts guarantee you 4% per year.
Compared to having to save in your bank which may charge you only a 0.05% interest per year, making that extra CPF top-up sounds like the better deal.
How much to contribute?
Contribution to Mediave is determined based on your age and how much you have earned for the year.
|Age||Income (NTI) Above $6000 – $12,000||Above $12,000 – $18,000||Above $18,000|
|Below 35||4%||4 – 8%||8% (Max: $5,760)|
|35 to below 45||4.5%||4.5 – 9%||9% (Max: $6,480)|
|45 to below 50||5%||5 – 10%||10% (Max: $7,200)|
|50 and above||5.25%||5.25 – 10.5%||10.5% (Max, $7,560)|
You can also use the Medisave Contribution Calculator to calculate the amount to contribute.
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