If you read social media, you may get the impression that CPF is a terrible scheme that is concocted to “steal” everyone’s money. Here is a different view of CPF. In Singapore, your CPF account is the safest investment you can make with the highest returns. Unlike savings account that are insured up to $50K, your entire CPF savings is backed by the full faith and strength of the Government of Singapore, which has one of the highest credit rating that any country can aspire to. In short, there is virtually no chance that CPF will default on its obligations. And it is politically untenable to let that happen!
Another point that is often missed when you look at CPF as a providence fund for old age is the overall low inflation and strength of the Singapore dollar. For comparison, if you look across the causeway, Malaysia’s EPF pays a higher interest rate for it members. But if you take into account the inflation rate in Malaysia eating at the purchasing power of the Ringgit and a declining exchange rate, the picture is not so rosy. As a providence fund, what is important is the preservation and growth of the purchasing power of your lifetime savings — not the nominal sum in your account.
Most of you will have received your CPF 2018 Annual Statement by now. When I got mine, in bold print, CPF tells me how much money they credited into my account under “Total Interest Credited” — or how much money did CPF make for me in 2018. Unfortunately, in reading the statement alone, I am confused as to how they derive my interest earnings – so I dug a little deeper.
- In this current low interest rate environment, CPF is the best deal in town because the Ordinary Account has to pay a minimum of 2.5% p.a. as mandated by law. For comparison, the DBS FD rate for SGD is about 0.8% for 12 months. Every dollar in your Ordinary Account should be making you a whopping 2.5% payout!
- Things are even better for the Special and Medisave balance in your account. The legislated minimum rate is 4% – unless the benchmark exceeds that, which is not likely for now. The benchmark yield is the 10-Year Singapore Government Securities (10YSGS) plus 1%. Again, when you compare that to fixed deposits, this is a winner!
- Like the above, your Retirement Account will also earn a floor rate of 4%, unless the benchmark rate is higher.
- The bonus additional interest rate was implemented to help those with lower savings earn more interest to build their accounts. Alol members will earn 1% extra on their first $60K of their combined balance (but subject to maximum of $20K from Ordinary Account). If you have more than a combines $60K in your CPF, you will earn an additional $600.
- For the seniors, there is another sweetener to help build our savings for retirement. If you are 55 and above, you will get an additional 1% p.a. on the first $30K of your combines balance, or $300 – which will be credited to your Retirement Account.
In my case, 2018 averaged me 3.26% — which I feel is quite good. Let’s use a simple example to illustrate. If you are above 55 and have $100K in your CPF broken into $10K in Ordinary, $10K in Special, $20K in Medisave and $60K in Retirement accounts. If that is your CPF portfolio, your total interest credited will be $4,750 for the 12-months or averages out to 4.75% rate. Clearly, this is an excellent rate of return by any measure in today’s environment! Here is the breakdown: (2.5% x 10K) + (4% x 30K) + (4% x 60K) + (1% x 60K) + (1% x 30K). Remember that the average 12-month fixed deposit rate for major banks is hovering around 0.7 to 0.8% p.a. for the same period!
In summary, your CPF portfolio is still the best investment in Singapore in terms of safety, security and returns on investment.