Currently the interest rate for CPF OA is 2.5% p.a. and Special, Medisave and Retirement Accounts (SMRA) is 4% p.a. with an additional 1% paid on the first $60,000 of a member’s combined balances (with up to $20,000 from the OA). Refer to my earlier post (http://www.ngaikboon.com/do-you-know-01-earn-up-to-5-interest-on-your-cpf/)

However, do you know that these interest rates are not guaranteed and we will likely see more fluctuations in the rates after 2015 especially for SMA!

1. Ordinary Account.  Monies in the OA currently earn the legislated minimum 2.5%, or the 3-month average of major local banks’ (UOB, DBS and OCBC) interest rates, whichever is higher. I think it is highly unlikely in the near future that the 3-month average interest rate of the 3 local banks will exceed 2.5%, hence we can be quite confident that the OA interest rate will continue to stay at 2.5% for the foreseeable future.
2. Special and Medisave Account. Now if you are thinking that SMA will continue to earn 4% interest rate, it’s time to think twice! The current 4% floor rate is guaranteed by the Government only till Dec 2015. The interest rate for SMA is actually pegged to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%. This will take effect from 1 Jan 2016 if the Government does not extend the floor rate of 4% any further! The current yield ranges from 1.6% to 2.6%, so we may not be getting the 4% interest rate on SMA any much longer! However, 3%+ is still not too bad a rate I feel since it is essentially risk free.
3. Retirement Account.  The current floor rate for RA now is also fixed at 4% p.a. RA monies will be invested in Special Government Securities (SSGS) which will earn a fixed coupon rate equal to the 12-month average yield of the 10YSGS plus 1% at the first point of issuance in the year from 1 January 2010. The average yield of the 10YSGS plus 1% from November 2013 to October 2014 is 3.40% p.a. Need I explain further?

Hopefully you are not lost by now! A simple takeaway from this is that the days of 4% interest rate are numbered and we should brace ourselves for lower interest rates for our SMRA come 2016 unless the Government extends the floor rate further. Perhaps a positive note from this is that we could also potentially get more than 4% if the yield rates of 10YSGS are good! Let’s wait to see how this will pan out soon.

Source:

1. http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_17Feb2015.htm

2. http://mycpf.cpf.gov.sg/Members/home.htm

Source: http://mycpf.cpf.gov.sg/CPF/About-Us/Intro/Intro.htm

5% risk free interest rate! I don’t think you can find a better offer out there in the market. To maximise your savings in the CPF, I would recommend the following:

1. Maintain $60,000 in your CPF. You should at least maintain $20k in your OA and another $40k in your Special, Medisave and Retirement Accounts (SMRA). As OA is more liquid and if you do not have $20k in your OA, do try to maintain at least $60k in your SMRA so as to enjoy the extra 1% interest. To give you a better sense of what the extra 1% can mean to you – 1% interest on $60k for a year is $600 and when compounded over a period of 10 years, you can get about $6300 in interest. So if you have $60k in your SMRA earning a 5% compounded interest, you can double your principal to $120k in about 14.5 years. Hence, do note that if you want to invest your OA and SA, it is advisable to invest your OA and SA only if you have excess of $60k in your CPF accounts. Else you may be better off keeping the money in your CPF and enjoying the additional 1% interest rate.
2. Voluntary Cash Top Up to CPF. If you have excess cash on hand and is not into investment. It may not be a bad idea to make cash top up to your CPF to make up to the $60k limit. I’m coming purely from the angle that your money is better in the CPF than leaving it idle in the bank where you are getting much more interest and the money in your CPF can be used for future retirement planning.