[CPF] Why is CPF Ordinary Account Interest Not Rising?

On 29th May 2023, CPF Board announced that they will increase the interest rate on Special Account (SA) and Medisave Account (MA) to 4.01% for July-September 2023.

The CPF Ordinary Account (OA) and Retirement Account (RA) interest rates will remain at 2.5% and 4% respectively.

With interest increasing on things like mortgages and loans, fixed deposits and government securities, why is it CPF interest has barely changed?

We will explain it today in this article.

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Recommended Read: Trevor Noah Explaining CPF

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How is Ordinary Account (OA) Interest Calculated?

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Every three months, CPF will look at the average 3-month interest rates provided by the main local banks.

If the 3-month bank rate is > 2.5%, the bank rate will be used as the interest rate for the next 3 months.

If the 3-month bank rate is < 2.5%, 2.5% will be used as the interest rate for the next 3 months.

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Recommended Read: Why You Should Max Your CPF Retirement Sum Early

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What is the Average 3-Month Bank Rate?

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The average 3-month bank rate for the period February-April 2023 is 0.66%.

Because it is lower than 2.5%, hence 2.5% is given to all CPF OA balances.

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Recommended Read: Simplifying UOB's 7.8% Interest Rate

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I Thought Banks are Giving Up To 7.5% Interest?

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CPF uses the various banks' 3-month fixed deposit rates to determine the CPF OA rates.

The 7.5% rate given by the banks are "promotional" rate given on the respective banks' savings accounts.

The CPF OA uses the fixed deposit rate instead of the savings account rate, so even if the interest rates on savings accounts are higher, it will not affect the CPF OA interest rates.

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Conclusion

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Although the CPF OA interest rate is not increasing in the latest round of interest rate review, 2.5% is still a pretty good interest rate for an account that provides the flexibility of funding a home purchase, education, or investment.

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供房贷：使用 CPF 还是用现金？

 “我应该用 CPF 还是现金支付我每月的房贷？”

这可能是要买房的人们经常考虑的问题。

您应该选择哪个？

让我们来看看吧！

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情境一：用现金支付房贷，把 CPF 里的钱留在 CPF 赚利息

这是最不常见新加坡人用来支房贷的方式。

1. 当您将您的资金保留在 CPF OA 里，您可以赚取 CPF OA 的利息（2.5% + 1%）。
2. 使用现金支付房贷款也不会产生 accrued interest。
3. 但用此方式付房贷，您的流动现金会减少。因此不建议大多数人这样做，除非您有相当大的一笔现金或收入来维持您的每月房贷。

我所认识的那些人会这样做的人，

1. 有足够的现金/工资支付他们每月的房贷，
2. 故意保留他们的钱在 CPF 里以获得高利率。

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Recommended Read: Simplifying UOB's 7.8% Interest Rate

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情境二：使用 CPF 支付房贷

这是绝大部分新加坡人最常用来支付房贷的方式。

大多数人的想法是：我的钱被锁在 CPF 里。我得等到 65 岁才能取出，大不如好好把用它来支付我每个月的房贷。

1. 您将无法赚取 CPF 利息，因为这笔钱已被用于支付您的物业。
2. 您所动用的 CPF 资金将会累计 accrued interest。将来当您卖房子时，您需要将所动用的资金 + accrued interest 一起归还到您的 CPF 账户中。
3. 您可以留有现金在手！手里有现金，若祥投资或用于其他用途都行。

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总结

最后一切都得根据您自身的情况，决定哪个是最适合您的方式。

没有正确或错误的选择；只有是否适合您的选择。 

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Trevor Noah Explaining CPF

Trevor Noah explaining CPF - generated response by ChatGPT.

Who is Trevor Noah?

He is a South African comedian and television host; best known as the host of "The Daily Show," a satirical news program that offers a humorous take on current events. 

And sure we would like for the real Noah to explain it to us, but the ChatGPT version would do just fine.

In fact, after reading what ChatGPT generated, we must say, we are quite impressed because we can completely visualise Noah describing CPF in almost the same way ChatGPT responded.

It was so convincing that we asked for 2 different versions of how Noah would describe it.

Below are the responses generated by ChatGPT:

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Version 1:

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Ladies and gentlemen, I have to say, the Central Provident Fund in Singapore, it's a unique beast. 

It's a savings plan for the future, and it's mandatory. 

And you know me, I love anything that's mandatory, because it means I have no choice but to participate.

But the CPF, it's not just your average savings account. 

No, no, no. 

It's a multi-faceted, government-administered plan that combines aspects of retirement savings, healthcare funding, and even housing. 

It's a one-stop shop for all your financial planning needs.

Now, some might see this as a good thing, having the government handle your savings and retirement planning. 

But on the other hand, some folks might feel like they're losing control of their own money. 

And you can understand why right? 

I mean, it's hard enough to trust banks with our hard-earned cash, let alone the government.

But here's the thing, despite its complexities and limitations, the CPF has been around for over 60 years, and it's helped millions of Singaporeans save for the future. 

And you know what they say, if it ain't broke, don't fix it.

So, the CPF, it's a unique, mandatory, government-administered savings plan, and whether you love it or hate it, you have to admit, it's a pretty fascinating system. 

And who knows, maybe one day it will become the norm all around the world. 

But until then, we'll just have to keep a close eye on it and make sure it's working for the people.

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Recommended Read: Why You Should Max Your CPF Retirement Sum Early

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Version 2

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Ladies and gentlemen, let me tell you about something that's a little bit like a piggy bank on steroids. 

It's called the CPF, and it's a mandatory savings plan that every working person in Singapore has to participate in.

So, imagine you've got a job and every month, a portion of your salary goes into this fund, and you can use it for things like housing, healthcare, and education. 

It's like a personal retirement account, but the catch is, you can't just access it anytime you want.

Now, I know what you're thinking - why would anyone agree to that? 

But, it turns out that the CPF system has been successful in ensuring that people in Singapore have a comfortable standard of living after they retire.

But, of course, it's not all sunshine and rainbows. 

The restrictions on accessing the funds have faced criticism, and there have been debates about the government's management of the funds.

But overall, the CPF is a unique system that's had a significant impact on the lives of Singaporeans. 

It's kind of like the firefighting robot from the movie Wall-E that saves the day, except instead of saving the world, it saves your financial future.

So, there you have it, the CPF in a nutshell. 

It's a little complicated, but it's worth understanding if you want to be a part of the financial future of this island nation.

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Recommended Read: Simplifying UOB's 7.8% Interest Rate

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Transfer CPF Money from Ordinary to Medisave Account

Correction: we made a mistake in our earlier article, and we have thus made the edits. We like to thank our readers for pointing out to us when we make mistake in our research.

Today's topic was suggested by one of our readers.

If you got any questions/topics you would like us to talk about, let us know via the comments below or via this form.

You asked us what are some of the pros and cons of transferring money from your CPF Ordinary Account (OA) to your CPF Medisave Account (MA).

Here is the result of our research.

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Background

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If would like to know what is your Medisave Account for, click HERE.

But, long story short:

Source: CPF

You can use it to pay for your medical bills, family members' medical bills, as well as pay for medical insurance schemes like MediShield Life.

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Can it be done?

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Long story short: NO

You cannot transfer funds from your CPF OA to your CPF MA.

But, you can top up your CPF MA in 2 other ways.

• Voluntary contribution to all 3 CPF accounts (non-tax deductible)
• Medisave Account only (tax deductible)

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The Pros of topping up CPF MA

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Why would anyone want to top up to their CPF MA?

So why would anyone want to transfer money from your CPF OA to CPF MA, here are some of the reasons.

1. Extra interest

CPF OA pays 2.5%+ interest per year

If you are saving money for your medical bills, you are probably stashing it away in some low-risk portfolio that gives less than 1% interest per year.

If that's that case, why not allocate a portion of it into CPF MA, which pays 4%+ interest per year.

Of course, you would still need to keep a portion of it in cash because there's a portion of your medical bills that still requires cash payment.

Just moving money from your OA to your MA gives you an extra 1.5% interest per year.

2. Has a cap

Your MA savings is subjected to a cap, known as the Basic Healthcare Sum (BHS).

As of 2021, the BHS is set at $63,000 for those 65 years old and below.

Any amount that is in excess of your BHS will flow over to your

• CPF Special Account (SA) - if you are below 55 years old
• CPF Retirement Account (RA) - if you are 55 years old and above

Source: CPF

So, technically, your CPF MA money is not a bottomless pit where money keeps going in without any way to take out unless you are hospitalised

Your CPF MA will reach a cap, after which money will flow into your CPF SA or CPF RA, where it can be withdrawn (if other conditions are met of course 😉)

For more information on the BHS, click HERE.

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The Cons of topping up CPF MA

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Here are the cons of topping up your CPF MA.

While you will get higher interest by making the transfer, there are also cons associated with it.

Here are the cons of transferring money from your CPF OA to CPF MA.

1. One-way street

You cannot un-do the top-up.

Once the money is in your CPF, it's going to be very hard for you to withdraw it out (except if you meet the various T&Cs).

Once you transfer from your CPF OA to your CPF MA, you cannot transfer it back from your CPF MA to your CPF OA.

2. Potentially no tax benefits

If you do a top-up via the Voluntary Contribution (VC), then there is no tax benefit.

However, if you do a voluntary CPF MA-only top-up using cash, the amount that you top up is tax-deductible. But, it will be subject to your maximum personal income tax relief cap.

However, if you transferred it from your CPF OA to CPF MA, there is no tax benefit.

3. Less cash

If you kept cash in your pocket, you can use it any way you like. 

Pay for a mortgage, pay for a holiday trip, pay for medical bills, anything!

But once you put it into CPF, the things you can use it for will be subjected to limits and restrictions.

Topping up cash into your CPF MA, while will earn you higher interest, will restrict you to using it only for medical purposes and nothing else.

Some day down the road if you realised you need extra cash to pay for a home downpayment, you cannot withdraw it from your CPF MA to pay for the downpayment.

3. Less ways to use your funds in CPF

If you kept the money in your CPF OA, you can use it for housing, education, insurance premiums, and other purposes.

But if you transfer the money to your CPF MA, you can only use it for medical purposes or to pay for medical insurance premiums.

If you are currently paying your home loan using CPF, if you make a transfer to your CPF MA and cause your CPF OA to have insufficient funds to pay your monthly mortgage, then you might have to pay your mortgage in cash.

In which case, it might be better if you just top up cash into your CPF MA (since this is tax-deductible) while paying your mortgage is not.

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Conclusion

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There is no one-size-fits-all solution.

For example, if you got sufficient funds in your CPF OA to pay your mortgage, and would like to grow your CPF MA faster and maximise the interest you are earning from CPF, then you can consider making the top-up.

But, there is no hard-and-fast rule. 

Whether or not to top-up cash into your CPF MA depends heavily on your circumstances.

Whether or not to transfer the money from your CPF OA to your CPF MA, depends heavily on your circumstances.

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Monthly Housing Installment: Use CPF or Use Cash?

"Should I pay my monthly property installment using CPF or cash?"

This is probably a very common question people who just bought their house think of.

Which should you choose?

Let's find out!

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Scenario 1: Use cash to pay for mortgage, CPF money remains in CPF

This is the least common way Singaporeans tend to pay for their property. 

1. You are earning interest (2.5% + 1%), by keeping your money in CPF OA.

2. No accrued interest incurred from using cash to pay for housing loan.

3. You will have less cash on hand, thus it is not recommended to do this UNLESS you have quite a sum of cash or income to sustain your monthly mortgage.

Usually, those people that I know do this tend to 

a) have sufficient cash/salary to pay for their mortgage, and 

b) are keeping their money in CPF to earn the high interest because there is no where else that pays 2.5% (or 4% if you transfer to SA).

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Scenario 2: Use CPF to pay for mortgage. 

This is the most commonly used method to pay for most property purchase in Singapore.

Because the idea is: my money is locked away in CPF. I cannot touch it until age 65, might as well use it to pay for my property.

1. You won't be able to earn CPF interest because the money has been used to pay for your property.

2. You will incur accrued interest, which you would need to return back to your CPF account when you sell your house in the future.*

3. You get to keep cash in your hands! There's a lot of things you can do with cash that's in your hands, like investing! 😉

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Conclusion

Depending on your own circumstance, decide which is the right path for you to take.

There is no right or wrong option; just whether it suits you or not.

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The CPF Withdrawal Age & CPF Payout Eligibility Age

There are 2 age-numbers about CPF that you should know about.

They are the CPF Withdrawal Age, and the CPF Payout Eligibility Age.

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Recommended Read: Should I Top Up My Young Next-Of-Kin's CPF?

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What is the CPF Withdrawal Age?

Singapore's CPF Withdrawal Age is currently set at 55.

This is the age you can start withdrawing money out of your CPF account.

How Much Can I Withdraw?

You can only withdraw money above the Full Retirement Sum or $5,000 (whichever is higher).

Alternatively, you can withdraw money above the Basic Retirement Sum if you perform a property pledge.

Click here to see the examples of how much you can withdraw.

For members turning age 65 from 2023 onwards, they can also withdraw up to 20% of their Retirement Account savings in a lump sum anytime from age 65 onwards.

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Recommended Read: Cannot Withdraw CPF Money If Never Hit CPF Retirement Sum?

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What is the CPF Payout Eligibility Age?

Singapore's CPF Payout Eligibility Age (PEA) is currently set at 65.

This is the age you can choose your CPF LIFE plan (CPF LIFE) and start receiving monthly payouts until you pass away.

You also have the option to start your CPF LIFE payouts later, up to age 70.

Why Would I Want To Delay My Payout Age?

You can choose to start receiving payouts anytime between age 65 and age 70 (eg when you reach age 67), but the latest age to start is 70. 

For each year deferred, your future CPF LIFE monthly payouts may increase by up to 7%.

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Conclusion

Understand at what age you can withdraw how much from CPF.

Consider if you really need to make that withdrawal at 55, or is it better to keep the money inside CPF to earn the higher interest rates.

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Recommended Read: Why You Should Max Your CPF Retirement Sum Early

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Should I Top Up My Young Next-Of-Kin's CPF?

Young next-of-kin refers to family members that are below the age of 55.

We'll do the 'next-of-kin above age 55' next time.

So subscribe to us if you want to be notified when the next article is out 😉.

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Who Qualifies As Next-Of-Kin?

• Spouse
• Siblings
• Parents
• Parents-in-law
• Grandparents
• Grandparents-in-law

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Benefits of Topping Up

1. Tax Incentive

If you top up your next-of-kin's CPF accounts using cash, you get up to $7,000 per calendar year of tax deduction.

2. Earn More Interest

Topping up to your next-of-kin's CPF allows them to build up their retirement savings, and it will earn interest of up to 6%.

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Criteria

There is a list of criteria to fulfil before your cash top-up to your next-of-kin qualifies for the tax deduction.

1. For All Next-Of-Kin Below Age 55

To recipients age below 55, you only get the tax deduction for up to the current Full Retirement Sum (FRS).

FRS - SA Savings - SA monies withdrawn under CPFIS*

*CPFIS: CPF Investment Scheme

Example:

The current CPF FRS is $181,000

Your mother's CPF SA currently has $150,000 and had previously withdrawn $30,000 for CPFIS.

So her "Total SA Savings" is $180,000.

If you top-up $7,000 cash to her CPF SA, only $1,000 will be eligible for the tax deduction.

Any additional amount ($6,000) you top-up will not be eligible for the tax deduction.

2. In Addition For Spouse/Siblings

To qualify for the tax relief for spouse or siblings top-up, in addition to the criteria above, they must also meet one of the following criteria:

1. Income (e.g. salary or tax-exempt income such as bank interest, dividends and pension) not exceeding $4,000 in the year preceding the year of top-up*; or
2. Handicapped** 

* "Income" of a person would include income from all sources, such as tax-exempt income (e.g. bank interest, dividend and pension) and foreign-sourced income remitted into Singapore. Hence investment income/rental income/directorship income etc, are considered to be the income of a person.

** A handicapped person is one who has been incapacitated mentally or physically. Some examples are visual-impairment, loss of hearing, loss of limb and dementia.

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Recommended Read: Why You Should Max Your CPF Retirement Sum Early

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Any Additional  Things to Note?

One More Thing...

There is a cap on maximum tax deduction one can receive in a given year.

The personal income tax relief cap is currently $80,000.

Meaning you won't get any additional tax deduction for each dollar you top-up to their CPF accounts if you hit the tax deduction cap of $80,000 before the top-up.

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Conclusion

Topping up next-of-kin's CPF for tax reduction is a lot of work.

Need to make sure they have not met FRS.

Need to make sure they meet the income criteria.

Need to make sure I have not hit the cap for tax relief.

So view the top-up as helping your next-of-kin hit their retirement goals.

The tax deduction is just icing on the cake; additional benefits.

Not the main point.

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Recommended Read: Cannot Withdraw CPF Money If Never Hit CPF Retirement Sum?

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Cannot Withdraw CPF Money If Never Hit CPF Retirement Sum?

Today, we would like to share with you an important issue we believe every Singaporean faces: What happens if I cannot hit my CPF Retirement Sum?

Answer: NOTHING HAPPENS!

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Recommended Read: Answering the 2 Common CPF "Complaints"

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Seriously, Nothing

Do not worry. 

If you do not hit the Retirement Sum (FRS, BRS, or ERS), there is no penalty involved.

You are also not required to top up the difference to CPF in the event you do not hit the Retirement Sum.

Yes! You are correct! 

It is not compulsory for you to hit your CPF Retirement Sum.

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You Still Get A Monthly Payout

Whether you hit it or not, you would still draw a monthly payout from CPF when you reach your draw down age (age 65). 

You will just receive a lower money payout from CPF.

Well, less money in Retirement Sum = Lower Monthly Payouts.

Make sense right? 🤷‍♂️

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Recommended Read: The CPF Bond That You Cannot Sell

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But The Lump Sum Withdrawal

The only problem is that you are unable to withdraw most of your money in your Retirement Account - you can only withdraw up to $5,000 at age 55.

For members turning age 65 from 2023 onwards, they can also withdraw up to 20% of their Retirement Account savings in a lump sum anytime from age 65 onwards.

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If I Want To Withdraw More Money?

You can pledge your property to withdraw money in excess of the Basic Retirement Sum (BRS).

The BRS as of 2020 is set at $90,500.

If you pledge your property at age 55, you will be able to withdraw money in your CPF in excess of the BRS.

Eg: if you have $100,000 in your Retirement Account (RA) as of August 2020, you can withdraw up to $9,500 from your RA if you pledge your property to CPF.

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Conclusion

Don't fret over hitting the Retirement Sum.

It is not the end of the world if you don't hit it.

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Recommended Read: Why You Should Max Your CPF Retirement Sum Early

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Promos & Referrals
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The CPF Bond That You Cannot Liquidate

While most people consider CPF money not as theirs and ignores it as part of their retirement planning or investment portfolio, we tend to think that CPF compliments those 2 things!

We think that money in CPF is like money invested in Bonds (Terms & Conditions applied).

Even the CPF Board explains how your CPF monies are invested.
They are invested in Special Singapore Government BONDS.

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Recommended Read: 5 Financial Things to do in your 20s

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A standard retirement portfolio consists of bonds, stocks (equities), and cash.

In most cases, the goal is to try put as much money as possible inside your portfolio and withdraw as little as possible, allowing your money to grow over time to finance your retirement in the future.

We recommend Indexing for equities, read more about equities-indexing HERE

CPF fits into this criteria nicely - money only in, rarely out!

You can look at your Special Account like it is part of your Bond Portfolio!

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1. Pays You Interest
Think of your Special Account as a bond you bought that pays you interest annually.

Even better, think of it as a long-term bond! - one that starts when you start working and ends when you reach your retirement age (kind of like a 40-year bond).

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2. Pays You A High Interest
Bonds today pay little/low interest! - you are lucky if you found one paying you 3%!

Fortunately, CPF SA pays a minimum of 4%!

It comes with a bonus +2% interest too (terms & conditions applied).

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Recommended Read: You Should Not Choose the CPF LIFE Basic Plan

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3. High Credit Rating
The money inside is "backed" by the Singapore government!
It is the few remaining AAA rated countries left in the world.

That is essentially risk-free!
It is hard to find a high interest-paying risk-free rate of returns these days!

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4. Fits Your Retirement Goal
To achieve the amount required for your retirement, not only is the returns you get important, but also the discipline to keep the money inside your nest!

It is preferable to have more money going in and less money going out of your retirement portfolio.

CPF is able to do just that - it is almost literally a one-way traffic!

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5. The Disadvantage Of This "Bond"
You cannot withdraw money out from your CPF - unlike a normal bond where you can sell it for cash.

That is the drawback of getting a higher interest from a "bond".

But, since it is for your retirement goal, you really shouldn't mind the problem of not being able to withdraw it out.

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6. Allows More Allocation To Stocks
Because the money in your CPF forms part of your bond portfolio, you can allocate less of your cash money into bonds and more into stocks, which allows you to earn a better rate of return.

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Recommended Read: Answering the 2 Common CPF "Complaints"

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Conclusion
If you are planning your retirement portfolio, you can consider setting your CPF SA balance as your "bond allocation".

It would allow you to capture a higher overall rate of return at lower volatility & risk.

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Promos & Referrals
We are starting to build a list of Promos and Referrals for our readers.
Click here to view the full list of Promos and Referrals we have. 

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Hey You!

If you have a money related story about you or your relatives' that you want to share, let us know in the comments below or email us at investmentstab@gmail.com.
Alternative, you could fill in the form below for us to contact you.
Story Form

---

Dear Reader!
As we progress towards the next phase of our journey, we would like to find out what would make you like us even more.
We hope you could help us fill in a short survey of 8 questions (4 of them are MCQs) so that we can help tailor our content to you.
Survey

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?
Have feedback? Tell us now!

Follow us on Facebook and Instagram for more timely updates about finance-related articles and memes! 😁
Subscribe to our newsletter too in case social media platforms decide to stop showing you our content.

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