CPF is going to extend 4 per cent minimum interest rate on savings in the Special, Medisave and Retirement accounts (SMRA) until Dec 31, 2013.

Since Jan 1, 2008, these savings have been invested in Special Government Securities which earn an interest rate pegged to the formula of:

12-month average yield of 10-year Singapore Government Securities (SGS) + 1%

Many people are not aware of the impact of such pegging. The average yield of the securities plus 1 per cent was merely 2.55% from Sept 1 last year to Aug 31 this year. CPF members were lucky because since 2008, CPF has provided a minimum 4 per cent interest, or floor rate and this minimum rate has been extended three times due to global economic conditions and exceptionally low interest rates.

With newly announced QE 3, US interest rate will stay low till at least mid 2015. Since Singapore interest rate is significant affected by US interest rate, 10 year yield of Singapore Government Securities (SGS) will stay low. In the past, 10 years Singapore Government Bond was able to hover above 2.5%, but since 2011, it has stayed low at around 1.5%. How long can this 4% interest rate to be given to CPF members, that is a big challenge to the board.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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