Tan Kin Lian's Blog: Interest rate on CPF savings

Wednesday, April 02, 2008

Interest rate on CPF savings

Mr. Tan,
From 1 January this year, interest rate for savings in the Special, Medisave and Retirement Accounts (SMRA) is pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. The average yield of the 10YSGS over one year, from 1 March 2007 to 29 February 2008, plus 1% works out to be 3.75%.

According to the news, CPF Board will only provide a floor of 4% for the Special, Medisave and Retirement Accounts rate for 2008 & 2009 only. The 4% will be lifted after 2 years, and the 2.5% floor rate will apply for all CPF accounts thereafter.

In view that the average yield of 10YSGS from Mar 07 to Feb 08 is only 2.75%, I'm kinda worry about this lower rate.

Furthermore, remember that last year, CPF Board encourage members to transfer their OA to SA and earn a 4% steady yearly compound interest seems to be no longer valid after 2010.

Care to share you comments?
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_10Mar2008.htm

REPLY
I recommend the following:
1. Transfer your OA to SA to earn a higher rate of interest
2. Do not worry that the interest rate will drop below 4% as you still getting 1% higher than the market rate for govt bonds
3. I expect the interest rate to increase, due to higher inflation.
4. If you wish to earn a higher return on your OA, I suggest a low cost diversified fund.

See this FAQ:
http://www.tankinlian.com/faq/savings.html

7 comments:

Anonymous said...: Hi Mr Tan,

Interest rate may not necessary rise with inflation. Unlike most central bank, MAS does not fight inflation using interest rate. To combat inflation, MAS intervene in the currency exchange rate by allowing Singapore Dollar to appreciate faster.

The market will determine the Singapore Bonds yield. In recent months, the market had expected the appreciation of the Singapore Dollar and bid up the bond price thereby driving the yield lower.

Another significant reason for lower yield is lower US fed rate. As the fed is more concern about avoiding a recession rather than fighting inflation, most people do not expect the fed to raise interest rate any time soon.

So while I agree that the interest rate should eventually trend up (the hard question is when), I do not think it will do so due to inflation in Singapore alone.

P.S. I think your blog is great. I agree with your idea of choosing low cost investment funds, which is one of the smartest things a retail investor can do.; April 02, 2008 10:16 AM
Anonymous said...: Do not ignore the effect of huge foreign funds in Singapore depressing interest rates and appreciating property prices and inflation.; April 02, 2008 7:47 PM
Anonymous said...: Normally, interest rises in tandem with inflation. It is true in US where interest rate is used to tame inflation.But currently as you have said priority is the economy.
In Singapore it is the exchange rate and it is managed by basket of trade weighted currencies of the trading partners and this indirectly controls the inflation and interest rate. It is basically supply and demand.
Currently the interest rate should rise but the market seems to perceive inflation as temporary and there fore willing to accept a lower interest rate.
The recent 5 year bond has a 1.58% yield is evidence of this expectation. It bidded up the price. This seems a reflection of the actual interest rate.
Generally, interest rate , inflation and housing prices have strong correlation.

Zhummmmmmeng:o); April 02, 2008 9:34 PM
Anonymous said...: I don't think you need to worry what happens after two years. 2010 is election year, do you seriously think that our government will allow the interest rates to drop? they will probably guarantee it for another two years or add in some other instruments to support the 4%. Maybe they would tied in with the stakes they put in the failed US investment banks.

Look at the situation now, even at 2.5% and 4%, it is already money not enough for retirement, what chances do you have if the interest rates drop below 4%? This is not what a caring government will allow so I suggest you don't worry, have faith in the government and let them do the necessary.

You must of course, play your important part, which is to dutifully work till retirement age, which would be 70 in another 15 years time. If you stop work and stop contributing to CPF, then not enough for retirement, you cannot blame anyone but yourself.

Remember, the government did not force you to invest your hard-earn money. They say: listen to them, work hard, work long, stay with CPF and you guaranteed have money till you die. You invest, you take risk, you lose money, your business.

In fact, Mr. Tan makes good sense.

If you can set aside some of your savings and put them in the SA. With a compounding interest of 4% p.a., over 35 years (assuming you are age 35 now), you voluntarily put donate $1000/mth into SA, you get an estimate of $888,000! And not forgetting your usual 20% salary contribution and 14.5% employer's contribution to CPF ... I think CPF-SA is a very good retirement plan!

It is usually the greed that distract you from the simple truth. People will always ask you to invest - why? because they earn money from you. Low cost, high cost, all are expenses. Why incur such costs in the first place when you have zero cost and risk free - the CPF system.

Forget about the unheathy thinking of "retiring at 55/60". It is backward, laid-back thinking and makes you senile. We must work to keep our minds active, body healthy, and provide support the workforce.

Wish you the best.; April 03, 2008 12:54 AM
Anonymous said...: Do note that the CPF contributions for both employee (ie us) and employer drop as we grow older.

starlight; April 03, 2008 8:08 AM
Anonymous said...: Mr Tan,
I do have few investment policies(single and regular preimum)all funded by cpf a/c, either ordinary or special a/c. I seen not very attractive returns so far. Shall I sell them and put back to cpf a/c to earn fixed interest?; April 03, 2008 5:21 PM
Anonymous said...: SGD has gained 3.4% while PCI jumped to 6.6% in Jan 08 and inflation may hit higher than 5.5% soon. The central bank will strengthening SGD in in order to cope the imported inflation, said in October it would allow a faster appreciation...hopefully, govt can give 6% CPF interest rate soon lor.; April 03, 2008 11:31 PM