No changes to the CPF OA rate but there are other ways to get higher returns on CPF savings
https://www.straitstimes.com/business/no-changes-to-the-cpf-oa-rate-but-there-are-other-ways-to-get-higher-returns-on-cpf-savings
2023-12-20
SINGAPORE – The interest rate payable on Ordinary Accounts (OA) in the Central Provident Fund will remain at 2.5 per cent in January, although the rate for Retirement Accounts (RA) will rise for the first time since 2008.
The RA rate will go up from 4 per cent to 4.08 per cent in January.
The calls are getting louder for the OA rate to rise as well, with renewed discussion on whether it is time to review the formula for calculating this rate.
At the same time, the range of investment options are wider now, so CPF members can invest their OA savings in other instruments to earn higher returns.
The CPF Act states that the interest payable on all savings cannot go below 2.5 per cent, which is known as the floor rate.
Funds in the OA are subject to this 2.5 per cent floor rate.
Indeed, the OA rate has never gone above this level in the past two decades, although the first $20,000 of OA balances for CPF members under 35 earn one percentage point more, or 3.5 per cent.
This formula for computing the OA rate was derived in 1999 using the local banks’ savings and fixed deposit rates over a three-month period.
Associate Professor Chia Ngee Choon from the Department of Economics at the National University of Singapore noted that the bond market here has grown and the outstanding amount of government securities now exceeds $228 billion, a jump of more than sixfold from $35 billion in 1999.
She said CPF members are already investing their OA cash in such instruments, which include Treasury Bills (T-bills) and Singapore government bonds, and earning higher returns.
Prof Chia thinks the formula to calculate the OA rate should be broadened to incorporate government securities, on top of the existing savings and fixed deposit rates, so it better reflects the prevailing investment environment.
This would also benefit people who are less financially savvy and unfamiliar with T-bills and government bonds, she added.
Any change will also impact the rate for HDB loans.
The loan rate is 0.1 per cent plus the OA rate, so higher OA rates will mean increased financing costs for HDB home loan borrowers, noted Prof Chia.
Whether the OA rate goes up or not, CPF members can still get higher returns on their savings.
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Fixed deposits
One way lies in fixed deposits, which any of the designated banks – DBS, UOB, OCBC and Maybank – can offer under the CPF Investment Scheme (CPFIS).
Only OCBC offers fixed deposits placements for OA funds, which can now be made digitally.
Placements made this way earn 3.1 per cent a year compared with the 2.7 per cent paid out for deposits made at branches.
These fixed deposits have a duration of six months with a minimum placement of $30,000.
Mr Sunny Quek, OCBC’s head of global consumer financial services, said there has been “considerable interest” from CPF members for fixed deposits.
He noted that CPF fixed deposits grew more than tenfold in October from November 2022 when OCBC first offered the option.
He added that close to 90 per cent of these deposits over the past month were placed digitally.
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Treasury bills
Another way to get a higher interest rate than the OA rate is to put CPF funds in six-month or one-year T-bills.
The final auction of six-month T-bills for the year is on Dec 20. The one on Dec 7 gave investors a return of 3.74 per cent.
There are no more auctions for one-year T-bills, with the next one taking place on Jan 25, 2024.
The last one-year auction on Oct 19 had a yield of 3.7 per cent.
You should note that when your fixed deposits or T-bills mature, the money goes back into your CPF Investment Account, where it earns nothing, so you need to instruct your bank to transfer the funds into your OA so they can start earning interest again.
It is also worth noting that CPF calculates interest on members’ balances differently.
Any contribution made during the month will start earning interest only the following month, while any withdrawals in the month will not earn interest from that month onwards.
This simply means there will be no interest for any amount that is deposited or taken out during the month, so you could potentially lose between one and two months worth of OA interest.
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CPF Investment Scheme (CPFIS)
CPF members can also put OA savings into unit trusts and investment-linked insurance products (ILPs) allowed under the CPFIS.
Morningstar notes that the overall performance of all CPFIS-included funds, which comprise unit trusts and ILPs, was negative 2.28 per cent in the third quarter, following two quarters of gains.
It added that CPFIS funds averaged a positive return of 6.41 per cent in the 12 months to Sept 30, while the returns over three years, expressed as a yearly figure, was 0.61 per cent.
Unit trusts did better than ILPs, with a one-year return of 8 per cent and a three-year annualised return of 1.41 per cent.
ILPs had a one-year return of 5.43 per cent and a three-year annualised return of 0.14 per cent.
Morningstar, which is the investment consultant for the CPFIS, evaluates the funds and investment products that go into the scheme.
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