CPFIS vs SGS: What will you pick?
Singaporeans who do not know about the CPF (Central Provident Fund) are far and few between. As of end of 2016, the total balance attributable to CPF members was $328.9 billion. The provident fund helps pay for everything from retirement funds to medical bills in times of need to education and housing for those who require it.
But as with anything good in life, it comes with some restrictions, particularly when you want to use your CPF balance to do some investing in hope of gaining better returns.
Known as the CPFIS (CPF Investment Scheme), it requires that any investor be at least 18 years old, not be an undischarged bankrupt person, have more than $20,000 in the Ordinary Account and/or have more than $40,000 in the Special Account.
Then there are restrictions on how much you can invest. If you are investing under the CPFIS-OA (CPF Investment Scheme – Ordinary Account), then you need to set aside $20,000 before you can invest. If you are using the CPFIS-SA (CPF Investment Scheme – Special Account), then you need to set aside $40,000 before you can invest. On top of that, you can only invest up to 35% of your investible savings, which is the sum of your OA balance and CPF amount withdrawn for education and investment, in stock and up to 10% of your investible savings in gold. A computed example is provided by the CPF board quite gratuitously.
There are limitations on the amounts that can be withdrawn as exemplified by the Minimum Sum for Retirement Account and withdrawal age of 55, too.
Types of Singapore Government Securities
In contrast to the CPF Investment Scheme, there are the low risk Singapore Government Securities, which come in two forms – the Singapore Government Securities (SGS) and the Special Singapore Government Securities (SSGS).
SGS are marketable securities which mean that ordinary investors can buy and sell them. SSGS are non-marketable bonds primarily issued to the CPF board by the Government.
So the type of securities that is of interest here is the former SGS or Singapore Government Securities.
These securities can be of both shorter and longer tenures. The securities of shorter tenures are called T-bills (Treasure bills) and have tenures of 3 months and 12 months. T-bills are transacted at prices that are less than the face value, or the price stated on it. As an example, if a T-bill has a face value of $1,000 but you pay $950 for purchasing it, then the remaining amount of $50 is considered the equivalent of interest that you have earned from buying, holding and selling this T-bill.
The securities with longer tenures are SGS bonds. Their tenures can vary from 2, 5, 7, 10, 15 to 20 years. Every six months, SGS bonds pay you some money – called a coupon – for as long as the securities are valid before maturity. When the SGS bonds mature, you can earn back, or redeem, the face value of the SGS bond.
For example, if you own $10,000 in SGS bonds at a coupon rate of 5%, you will get 5% of $10,000 or $500 in two instalments each year until the time the bonds mature, when you can get $10,000 or the face value of the SGS bonds.
Which is better: SGS or CPFIS?
Now, that you know more about both CPFIS and SGS, you need to figure out which suits you better. The CPFIS has a lack of withdrawal options until you are 55 years of age. That means if you invest mostly in CPFIS, you would have your investments tied up until you are 55 years old. Then, you will also need to confirm that you meet the minimum requirements for the CPF Investment Scheme including the $20,000 in the Ordinary Account and/or the $40,000 in the Special Account before you can consider this option.
What about the SGS bonds or T-bills? With them, you can either get a coupon or a discount, which would be equivalent to an interest rate on a regular security. Moreover, you can invest as little as $1,000 (or any larger multiples of it) and restrictions on investment are minimal. When you earn the equivalent of interest (be it coupon or discount), you do not need to pay individual income tax.
The Singapore Government Securities are fully backed by the government of Singapore. Therefore they are considered pretty safe investment choices on a global standard. You can also obtain regular cash flows before the term of the SGS bonds end. Besides these, SGS bonds offer you higher liquidity meaning you can buy and/or sell them in the secondary market if you wish, for example, to improve your cash flow or to generate greater investment returns, whatever the case may be. A possible negative aspect of the bonds may be that the price received on the bond may be lower than the purchase price if the investor decides to get rid of it before maturity.
Provided that you have sufficient funds for rainy days have been saved elsewhere, risk averse investors might want to try the SGS securities for a relatively risk-free, liquid investment choice that can help you diversify your holding of securities.