This Is The Significance Of The CPF’s Interest Rate Announcement For Your Finances
In a recent announcement made on 22 September, the Central Provident Fund (CPF) Board extended the enhanced rates applicable to various accounts. The highlights of the communication that has been issued are:
- The minimum 4% interest rates on Special, Medisave, and Retirement account balances have been extended up to 31 December 2018.
- For the three months from 1 October 2017 to 31 December 2017, your Ordinary Account balance can earn a maximum rate of 3.5% per year and your Special and Medisave accounts can earn up to 5%.
- Those over 55 years will earn an extra 1% on the first S$30,000 of their combined balances.
It is important to remember that in January 2008, the government amended the rules applicable to the interest rates that CPF balances would earn. At that time it was decided that Special, Medisave, and Retirement account balances would earn interest at a rate that would be 1% more than the 12-month average yield of 10-year Singapore Government Securities.
In view of the prevailing low interest rates at that time, the government had decided to maintain the minimum rate at 4% on Special, Medisave, and Retirement account balances. This extra interest was initially to be paid only up to December 2009. But as market interest rates remained low, the minimum floor rate has been retained at 4% since then by repeated extensions.
“The primary objective of the CPF Board is to provide for CPF members for their retirement planning needs,” explained Alfred Chia, CEO of financial advisory firm, SingCapital. “While the US is expected to hike interest rates, it’s going to be a slow process as they need to unravel QE. In a low interest rate environment, where equity valuations are getting higher, it is going to get harder to invest, and that is going to be a problem for CPF members and the Singapore Government.
“The fact that the CPF Board is keeping the interest rate, it shows they are putting CPF members’ interest as the top priority.”
Making up for a low interest rate environment
Currently, 10-year Singapore Government Securities yield a little over 2% per annum. Consequently, the rate payable on Special, Medisave, and Retirement account balances would have been just above 3% if it were not for the enhanced minimum rates announced by the government.
The following chart illustrates how important the enhanced rate of interest is for your CPF account:
|Quarter||Special account||Medisave account||Retirement account|
|July – September 2017||Minimum rate||4%||4%||4%|
|Rate according to CPF Board rules||3.09%||3.09%||3.08%|
|April – June 2017||Minimum rate||4%||4%||4%|
|Rate according to CPF Board rules||3.04%||3.04%||3.08%|
|January – March 2017||Minimum rate||4%||4%||4%|
|Rate according to CPF Board rules||3.08%||3.08%||3.08%|
Source: CPF Board
How increased rates can help to boost your retirement savings
Over the course of your working life, it is possible to accumulate a substantial sum in your CPF account. According to the rules that are currently in force, 37% of the monthly wages of an employee working in the private sector are contributed to the CPF account. The percentage is lower if you are over the age of 55. This money is allocated between your Ordinary Account (OA), your Special Account (SA), and your Medisave Account (MA) in the following manner:
As an example, if you are 35 years old or less than that, 23% of your CPF contribution will be allocated in your OA every month, while 6% will be allocated to your SA and 8% will be allocated into your MA.
A fourth account, your Retirement Account, will be created for you when you reach the age of 55. Subject to the CPF Board’s rules, parts of your Special Account and your Ordinary Account will go towards creating your Retirement Account.
All these balances earn interest at rates that are significantly above those available in the market. Take, for example, the interest available from a term deposit in a bank. DBS offers a rate of 1.2% per year on a five-year deposit. That’s the maximum period for which you can place your money in the bank.
CPF balances earn rates of interest that could be as much as five times higher. Your Ordinary account can earn 3.5%, while under certain conditions, your Medisave and Special Accounts can earn as much as 5%. In fact, if you are 55 years or more, you can earn 6% on your retirement balances.
The additional interest that you earn will help to boost your retirement savings. When you reach the age of 65, the sum in your Retirement Account will be used to pay you a monthly amount for as long as you live.
How much will you receive every month? That depends upon the amount that has accumulated in your Retirement Account and can vary between S$750 and S$2,000.
Higher interest rates paid on your balances will ensure that you accumulate a greater amount, leading to an increased monthly payout.
Should you top up your own or family members’ CPF accounts?
What if you have not accumulated enough money for your retirement? If you want a monthly income of S$1,280 to S$1,380 when you reach the age of 65, you should have a balance of S$166,000 in your Retirement Account (this is based on 2017 and amount is adjusted every year).
If you want to provide more for your loved ones, you can make use of the Retirement Sum Topping-Up Scheme. This scheme allows you to transfer funds directly to your Special Account or into your Retirement Account. You can even transfer sums into the accounts of your parents, parents-in-law, grandparents, grandparents-in-law, spouse, and siblings subject to certain conditions.
There are several benefits to topping up Special Account/Retirement Account balances. Firstly, you will earn an enhanced rate of interest. The transferred balance can earn a rate of up to 6% per year. This can be especially useful if you want any of your elderly relatives to receive an enhanced monthly income.
Remember that you can make top-ups using your CPF balance or cash. CPF balance transfer can be made only to your relatives while cash top-ups can be made to any recipient.
Cash top-ups carry an additional benefit. If you are depositing cash into your own Special Account or Retirement Account, you can get a tax benefit of up to S$7,000. The entire sum that you deposit will be reduced from your taxable income.
What if you deposit cash into a relative’s retirement account? You can get an additional S$7,000 tax benefit by doing this.
Beyond tax benefits, SingCapital’s Chia also pointed out that topping up an elderly family member or relative’s CPF account could be especially useful for someone who might be unable to manage their own retirement funds due to age, medical conditions such as dementia, or other reasons.
“You put this money into their CPF accounts, get a higher interest for them, and then it can be used for their medical bills, or they can withdraw it when they need it,” said Chia. In fact, he noted that the total number of top ups made were 30% higher in 2016 than in 2015, based on CPF’s figures, indicating that more people are recognising its benefits.
To be sure, the CPF program can enhance your savings and help you build up a substantial amount for your retirement. The Board’s recent announcement regarding rates will ensure that you earn more interest.
But it is up to you to top-up your account so that your balance grows faster. The additional sums that you deposit and the higher interest rates will give you increased retirement savings. Putting extra money into your CPF is one of the best ways to plan for your post-retirement years.