Thursday, May 26, 2011

456. CPF's Minimum Sum Scheme - poorly presently to members of the public

I am studying the CPF Minimun Sum Scheme for those retiring after 55 years old for my REA examination today and looked up the CPF Board's example. Certainly it is extremely confusing as the CPF education does NOT tell how it gets the $61,500. I figure out after a long time. If the exam question comes out today, I may be able to get correct answer.

Here is my sharing of knowledge to future candidates of REA and RES. See below and go to the CPF website (Minimun Sum Scheme).

My e-mail to the CPF is as follows:

Thank you. I really need the reply to Question 1 regarding the Minimum Sum where the co-owner's CPF usage is $40,000 immediately for my exam today!

The query is reproduced as follows:

1. Minimum Sum calculation example in your website. There are 3 tables but the first table shows $61,500 pledge amount up to maximum limit. I CANNOT FIGURE how you get this figure. Please ensure that you don't waste the time of the public by not revealing how you get the figure as I took over 10 minutes and still can't figure out.
2. Can retirement account for those over 554 years old be used to pay up housing loan?

The calculation from your CPF website is as follows:

HDB Valuation $300,000
Less outstanding loan $150,000
Co-owner's CPF usage is $40,000 which is <50% of the RESIDUAL VALUE. With the other 2 tables, you use RESIDUAL VALUE - Co-owner's CPF usuage. That is easy to understand. If I use the same formula, I should get $110,000. However, you state that the owner can pledge the property up to the maximum limit of $61,500. Where you get this figure is really a mystery. As a CPF education website, you should be careful and helpful.

Assume Minimum Sum after 55 years is $123,000. Is there some figures I had not factored in? Is it 50% of $123,000? If so, please say so! That figure comes to $61,500. Don't make the reader go round in circles by showing the side calculation as we can't understand many of your CPF and HDB's complex formulas, esp. those payment or co-payment or in this case, not allowed to pay, involving 50% of some figures NOT being achieved!

IN SHORT, the answer should be as follows:

If the co-owner's CPF usuage ($40,000 in this case) is less than 50% of the RESIDUAL VALUE ($150,000/2 = $75,000), THEN HE CAN PLEDGE HIS PROPERTY up to the maximum limit of 50% of the MINIMUN SUM (stated as $123,000 IN A CPF TABLE FOR JULY 1 2010 in CPF website). This is equal to $61,500.

Therefore, for a student taking examination under high stress, he gets zero marks if he uses the formula RESIDUAL VALUE - co-owner's CPF usuage AS THIS amounts to $110,000.

However, if the co-owner's CPF usuage is $80,000 (using same $300,000 valuation price, but now the outstanding loan is $200,000. This means the RESIDUAL VALUE IS $300,000 - $200,000 = $100,000).

In this scenario, the owner can pledge his property up to the maximum limit of $20,000 (shown in CPF website, table 2 where RESIDUAL VALUE - Co-owner's CPF usage or $100,000 -$80,000 = $20,000). This is because the CPF usuage is more than 50% of the RESIDUAL VALUE.
There if you give the answer as $20,000, you can full marks. But you get zero marks if you have got the first part incorrect. That means you just pass your examination if there are 2 parts. If there is only one part and you do the first part, and give the answer as $75,000, you may even fail the question as the correct answer is $61,500 (50% of $123,000)!

How many of the readers can understand what I am writing about?

There is another Real Estate Finance and Analysis - CPF Approved Housing Scheme - called AHWL. This involves 120% of Valuation Limit, current minimun sum of $123,000 (of which the cash component is $61,500). I better not attempt even to study this topic as it is even more complex! However it is part of the syllabus.

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