If you have Permanent Resident status in Singapore, you will be paying into the Singapore CPF scheme whether you wish to or not. Additionally, contributions will be made for you by your employer (assuming you are employed).
Though there is much to discuss in relation to contribution amounts and what you ought to do with the cash within your CPF whist you are here in Singapore, this article will not seek to give detailed advice thereon. That said, Given the guaranteed interest rates available, and given that they typically offer higher rates of return that other risk-free options, my general advice is to simply take the interest rates (as opposed to investing via CPF) and to view it as part of
the low-risk portion of you overall portfolio.
Instead, this article will highlight one key difference between how Singapore and the UK view your CPF account, and how that difference can lead to a large unexpected tax liability.
Singapore:
Whilst resident in Singapore, your payments into CPF are tax-decuctible. Additionally, there is no tax to pay on any investment growth within CPF, and withdrawals are also completely tax free.
Though you will often hear Singaporeans complaining about CPF, and having their money locked away from them until later in life, they perhaps do not realise how good they have it in comparison to the rest of the world. Having a scheme that is tax-free at all three stage (contribution, growth and payout) is something that most global governments do not allow.
If you leave Singapore and give up your PR, you will be required to take out the value that you have accumulated in your CPF without penalty (see Closing CPF Account). Currently the CPF Board estimate that the closure of an account will take up to 12 weeks.
So far, CPF looks like an incredible deal for any expat…..
United Kingdom:
Whilst resident in the United Kingdom, payments into a recognised ocupational or personal pension are tax-decuctible. However, payouts from those pensions are fully taxable (aside from a 25% Pension Commencement Lump Sum allowance on UK-recognised schemes).
If you move to the UK during a tax year, HMRC will typically split that year into two parts. The relevant date on which the split takes place will generally be when you start work in the UK or move into your home, whichever comes first (this is a simplification of the Statutory Residence Test for brevity). If you receive your CPF payout in the ‘UK Part’ of that year, you are treated as a UK tax resident when you receive that payment.
Given the above, the question then becomes ‘how would the UK treat my Singapore CPF withdrawal(s) if completed whilst I am UK tax resident’?
The UK taxes pension payments in full, and that also applies to overseas pensions. From that fact alone, you would logically expect any payment from your CPF account to be taxed at your marginal income tax rate in the year of receipt, possibly resulting in it being taxed as high as 45%!
Alternatively, if the UK opted to view your CPF account as something other than a pension, akin to any other savings or investment account with a bank or brokerage, you would be taxed ‘only’ on the gains made on your CPF investments (i.e. the difference between payout and contributions). The UK approach to pensions places us in the strange situation in which HMRC would effectively punish you for having an overseas pension rather than an overseas savings account!
The approach makes sense when dealing with UK pensions, as when paying into those a tax relief was given that would not be afforded to those paying into a savings account. From a UK perspective, a pension is not taxed at point of contribution or growth, but is taxed at time of withdrawal. In contrast, a simlpe savings account or brokerage investment account is taxed at time of contribution (in that payments made are from post-tax income) and growth (you pay tax on dividends, interest or on capital gains) but not on withdrawal (unless at that time realising any growth).
To confuse matters even further, a collection of now deleted posts by HMRC staff on their own community forums suggested that HMRC would take a third approach! Their answers, which I stress have now been removed from the ether, suggested that your Singapore employer contributions plus any growth in your CPF account will be taxable when taken out as a UK tax resident, whilst your own contributions will not be taxed. I never did locate any logic nor statutory basis for that approach, but for a while the below comment (now deleted) from HMRC admin is as close to a conclusive answer as we can get.
‘When the CPF is paid out as a lump sum to a UK resident, Income Tax is charged on both the employer’s contributions and any growth in value of the scheme investments (from 6th April 2017).’
Despite going fully through the legislation mentioned in the aforementioned HMRC forum posts, I could actually find no logical reason for the employee contributions also not being taxable, and am left wondering if the admin at HMRC has missed the fact that those are tax-deductible contributions in Singapore (instead viewing them as after-tax contributions into a pension). Regardless, at best those previous answers from HMRC suggest that much of a CPF withdrawal would be taxable.
Those posts having been removed, I am left having to revert to interpretation of the legislation in the absence of a direct answer in respect of CPF specifically. The two possibilities are:
1. CPF is an overseas pension. As such, everything that comes out to you as a UK tax resident is fully taxable as income (this is how HMRC typically treats pensions). Until you make a withdrawal, there is nothing to report to HMRC It is arguable that you may deduct from the taxable amount a) the vlaue as at 5th April 2017 and b) 25% to represent the PCLS equivalent.
2. CPF is simply a savings/investment account. As such, as a tax-resident you should report annually on any income or gains within the account and pay tax thereon. When it comes to take money out, that is not a taxable event and is not reportable
My own view is that, under the letter of the law, CPF is a pension and so would sadly be taxed as income when withdrawn. Under Sections 573–576 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), CPF apears to unavoidably be an overseas pension scheme. Since 6 April 2017 (Section 574A), lump sums from such schemes are 100% taxable as pension income at the recipient’s marginal rate.
That said, from experience I know that if you were to contact HRMC directly and ask them how you should report your CPF, some would tell you that my intepretation is correct but some would tell you to report gains and income annually instead (and so treat it like any other investment account).
My advice is therefore actually for most affected person to write to HMRC. If they provide an answer that is not merely pointing you to interpret the legislation yourself, you will then have something in black and white that you can defensily rely on. If you do not go through that step, legally you ought to report the CPF payout as income in the year it pays out.
Additional options include:
1. Take an extended break after leaving Singapore and delay your return to the UK
Given the 18 week estimate currently, that could be a very long holiday. This would be the ideal time to take yourself on that long trip around the world, with HMRC effectively paying for it in lost tax revenue!
Of course you may be returning to the UK with an employer who would not be so happy with this extended holiday.
2. Renounce PR and stay in Singapore until you receive the payment.
This could be done either by renouncing PR and having an EP granted to your company. We are unsure if the Singapore Govt will allow this, as they tend to take a dim view of those who renouce PR or Citizenship willingly, and may seek to make a point by refusing or delaying the EP application and any associated Dependent passes.
3. Make Use Of the new UK FIG Regime
The UK recently brought in a system by which those of us who have been non-UK resident for a long period can elect to opt-in to the Foreign Income and Gains Regime. Under that regime, your first 4 years as a UK tax resident see you pay no UK tax on overseas income and gains, with the only trade-off being that you forego your GBP 12,570 personal allowance in those years (a reasonably simple calculation can establish whether opting into the regime to take your CPF payout is a net win for you)
To qualify for this regime you must have been non-UK resident for the 10 years leading up to your return.
Other Countries:
In case any Australian’s are wondering, the ATO does not put you in this position when returning to Australia. Australia would simply tax any investment growth or interest on your CPF balance attributable to the time after you move back to Australia (a much fairer solution).
For Americans, as the US will have been taxing you on your income fully (including all CPF contributions) each year, the IRS would only wish to tax growth within your CPF account whenever that growth is liberated (wherever you are resident). One other note for Americans is that they would be well advised to avoid investing their CPF, and should simply take the interest rates given by the CPF Board (so as to avoid investing into any non-reporting mutual fund or PFIC).
David N Hood LLB (Hons)
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