SINGAPORE, June 2 — Interest rates for the Central Provident Fund (CPF) Special and Medisave accounts will increase in the third quarter of this year to 4.01 per cent per annum, up from 4 per cent — the first increase since 2008.
This is due to the increase in the 12-month average yield of 10-year Singapore Government Securities, which the interest rates for both accounts are pegged to.
The CPF comprises four components:
The Ordinary Account is for housing, insurance and investment payments
The Special Account is for old age and investment in retirement-related financial products
The Medisave Account is for hospitalisation and approved medical insurance
The Retirement Account is for monthly retirement payouts for members aged 55 and above. It is created when one turns 55. CPF savings, starting with those from the Special Account will be transferred into that account first, followed by savings from the Ordinary Account.
TODAY takes a closer look at how interest rates for the different CPF accounts are calculated and whether one should move funds to their Special Account to make the most of the higher rates and increase their retirement savings.
How are CPF interest rates calculated?
Interest rates for the Ordinary Account are currently set at 2.5 per cent per annum. This is computed based on the three-month average of major local banks’ interest rates.
The formula consists of 80 per cent of the interest rates for 12-month fixed deposit accounts, and 20 per cent of the interest rates for savings accounts among DBS, OCBC and UOB banks.
However, the rate is subject to a floor interest rate — a legislated minimum interest, of 2.5 per cent per annum.
This is why despite bank interest rates being around 0.66 per cent from February 2023 to April 2023, the CPF Ordinary Account’s interest rate will still remain at 2.5 per cent.
To ensure that the CPF board can continue to keep interest rates at these higher floor rates, the Government invests CPF savings in Special Singapore Government Securities.
These are non-tradable bonds issued specifically to the CPF Board for the investment of CPF savings.
Interest rates for the Special and Medisave accounts are computed based on the 12-month average yield of 10-year Singapore Government Securities, plus 1 per cent.
But this is also subject to the floor interest rate of 4 per cent per annum.
As the average yield plus 1 per cent has exceeded the floor rate of 4 per cent, the interest rate for these accounts has subsequently gone up as well.
For the Retirement Account, the rate is computed based on the weighted average interest rate of all the investments that Retirement Account monies are put into, subjected to a floor rate of 4 per cent per annum.
Interest rates for the Ordinary, Special and Medisave accounts’ interest rates are reviewed quarterly while the Retirement Account’s rate is reviewed annually.
Will interest rates rise further?
Interest rates for the CPF Special and Medisave accounts are pegged to interest rates for the 10-year Singapore Government Securities bonds.
These rates in Singapore are largely determined by foreign interest rates, especially those of the United States (US), as well as market expectations of movements in the Singapore dollar.
Jamie Lee, the head of financial planning and editorial at Endowus, said that the higher interest rates for the 10-year Singapore Government Securities bonds are mainly driven by aggressive rate hikes by the US Federal Reserve.
The Fed has implemented 10 straight rate hikes over the past 14 months, pushing its benchmark interest rate to about 5.1 per cent, the highest in 16 years.
This is to slow spending, cool the US economy, and bring down inflation.
Timothy Ho, the managing editor and co-founder of personal finance website DollarsAndSense said that rates going up or reverting back to the base level would likely be based on US monetary policy.
“If the Federal Reserve decides to tighten and increase interest rates, then the current rates may still increase,” said Ho.
On whether the rate for CPF’s Ordinary Account will increase, Associate Professor Chia Ngee Choon of the National University of Singapore said that it is “quite unlikely” to cross the 2.5 per cent benchmark rate, unless there are changes made to the formula used in Ordinary Account rate computation and if the rate is delinked from the HDB loan rate.
This is because the interest for Housing and Development Board (HDB) housing loans are linked to the CPF Ordinary Account interest rate, and a rise would impact those using their CPF savings to service their HDB loans.
The interest rate for HDB housing loans are pegged at 0.1 per cent above the Ordinary Account interest rate.
So an increase in this rate would imply higher costs for borrowers, said Assoc Prof Chia, who teaches Economics.
Agreeing, Christopher Gee, senior research fellow at the Institute of Policy Studies, said that an increase might benefit CPF members who have positive account balances in their Ordinary Account.
However, it would have a negative effect on those who are currently using the account to finance a HDB loan.
Assoc Prof Chia added that it may be time to relook at the formula used to derive Ordinary Account savings.
The current formula was set in 1999 and there has been significant developments in financial markets, while CPF members have also become more financially savvy, she said.
She added that the rate could be pegged to other financial instructions and use different combinations including fixed deposits and Treasury bills — short-term Singapore Government Securities.
Should I move my money?
Currently, CPF members under the age of 55 can transfer money from their Ordinary Account to their Special Account to take advantage of the higher interest rates.
Financial advisors told TODAY that this method is a good way to accumulate more funds, but should be carefully considered as the process is irreversible.
Any funds transferred to the Special Account cannot be transferred back to one’s Ordinary Account.
Ho of DollarsAndSense said: “For many of us who are relying on our CPF savings to fund our retirement, or at least part of it, this is a simple, fuss-free strategy to build our nest egg.”
He added that one does not require any investment knowledge or risks to earn the higher interest.
However, Lee of Endowus said that despite the “attractive” 4.01 per cent rate, CPF members need to understand the limitations of transferring monies into the Special Account, as the Ordinary Account savings can be used for purposes such as mortgage servicing and education loans.
Dawn Cher, founder of personal finance website SG Budget Babe added: “For younger couples who have yet to buy a house and are intending to use the Ordinary Account for mortgage, this is where they may choose to leave some money in the Ordinary Account so they can pay for this.”
Agreeing, Nur Fitria Rozlan, partner at business management consultant IAM Advisory Group, said that transferring one’s funds should be “a properly calculated decision to ensure one’s needs are taken care of, such as housing”.
CPF members may also transfer funds from their Ordinary Account to a fixed deposit in certain banks.
“But question here is the rate — few fixed deposits give higher than the 4 per cent in the Special Account, and there is the hassle of having to keep finding a new fixed deposit each time your one year term is up,” said Cher. — TODAY
