When it comes to retirement planning, you cannot ignore the Central Provident Fund (CPF). CPF is the default retirement solution for every Singaporean. Most people have some vague ideas about the system, but few people bother to dive deeper. A lot of people feel that since they have no authority over it, why bother?

As a result, myths about the CPF are easily formed and circulated.

  • How does the CPF board invest your money?
  • How much interest do you receive for your CPF savings?
  • Is the interest rate really guaranteed?

These are commonly misunderstood topics. In this article, I will shed some lights so that you can make better decisions when it comes to utilizing your CPF for your retirement planning.

People are always irrational when it comes to money. Through my work to discuss retirement planning with many clients, I have witnessed the rapid change in people’s opinions about CPF in recent years.

“Return our CPF”

For example, in 2016, a so-called “return our CPF” movement gained the public’s attention. The protestors criticized three perceived areas of the CPF system:

  1. The inflexibility and changing rules of the compulsory savings scheme.
  2. The low rate of returns on CPF savings.
  3. The lack of transparency in how CPF monies are used.

After receiving these criticisms, the government launched a huge marketing campaign to bring more clarity to the public. They set up a dedicated AreYouReady website and launched many youtube videos like this:

The “best annuity” in the world

The marketing was so successful that there was a 180 degree U-turn in public opinion. Netizens are now expressing their complete trust in the CPF system. Is there much change in the CPF system? Not really. It is a change in the public option. We soon saw postings like these:

  1. CPF Life is the best annuity in the world.
  2. You should top up your CPF to the maximum whenever it is possible.
  3. You should not invest in the stock market; instead, leave your money in CPF account to earn high “guaranteed” interest.
  4. Move your CPF ordinary account to the special account for higher interest and you will have $1m for your retirement fund.

Let me be clear, I am a big supporter of the government and thanks to them, we live a peaceful life with a high standard of living without skyrocketing property prices and protests like what is happening in Hong Kong.

My concern is that the board has taken care of CPF members too well and so people only look at things at the face value. Many people (including many financial bloggers) mistakenly compare CPF life to private retirement insurance plans because they do not understand the difference.

CPF Life does a risk-pooling of all the members’ interest to ensure the whole system is sustainable. It means once your monthly payouts have exceeded the amount you used to pay for your CPF LIFE premium, the subsequent payouts will be drawn from the pooled interest. But it also means if you pass on early, the interest earned from CPF Life will not be bequeathed.

Private annuities and CPF Life complement each other, they are not mutually exclusive.

But trying to explain this to an ordinary member is an uphill task, especially if they are misguided by a uniformed opinion in the online forum.

Another CPF saga

Earlier in the year, CPF became a hot potato again because one guy posted on facebook that the CPF “postponed” his CPF payout age, and it went viral.

It created such a public uproar that Minister Josephine Teo, had to publicly repeat that there is no change to the CPF life payout age.

The public isn’t interested in deeply understanding the CPF system, but instead, they may have developed some unrealistic expectations about how the CPF should work “according to their wishes”.

In my book “FIRE Your Retirement”, I mentioned that the CPF is one of the 5 pillars for Singaporeans’ retirement planning. But it shouldn’t be the only thing you have. For you to have a sustainable retirement income, you need to have a Kueh Lapis income portfolio.

Let’s talk about the CPF interest rate

I have heard many people say that they earn a 4% GUARANTEED interest rate from the CPF savings and it is the best investment that one can have.

This is interesting. Just a few years ago during the “return my wife” era, people were still complaining that the CPF interest rate was low. How come people are hoarding CPF interest now? Well, it is a typical anchoring behaviour.

After a decade of living in a low-interest-rate environment, a 4% interest rate sounds heaven-sent.

However, while we can assume that the CPF savings is risk-free because it is backed by the government, we should not assume the interest rate will remain unchanged.

First of all, you need to understand that the interest rates for each of your CPF accounts are computed using different methodologies.

According to the CPF Website, CPF members currently earn these interest rates:

  • Ordinary Account – Up to 3.50% p.a.
  • Special Account – Up to 5.00% p.a.
  • MediSave Accounts – Up to 5.00% p.a.
  • Retirement Account – Up to 5.00% p.a.

There are two things which you need to take note of:

  1. The stated interest is “up to” because the interest rates above include an extra 1% interest paid on the first $60,000 of a member’s combined balances (up to $20,000 from the OA).
  2. The interest rate is only “guaranteed” for a period and “reviewed” quarterly or yearly.

How is the CPF interest rate computed?

The CPF board is very transparent about this information. You can find the latest declared interest rates from the CPF website via this link.

  • Ordinary Account (OA) savings earn either the legislated minimum 2.5%, or the 3-month average of major local banks’ interest rates, whichever is higher, adjusted quarterly.
  • Special Account and Medisave Accounts (SMA) savings are invested in Special Singapore Government Securities (SSGS) which currently earn either 4% per annum or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher, adjusted quarterly.
  • New Retirement Account (RA) savings are invested in Special Singapore Government Securities (SSGS) which earns a fixed coupon equal to either the 12-month average yield of the 10YSGS plus 1% at the point of issuance, or 4%, whichever is the higher. The interest credited to the RA is based on the weighted average interest rate of the entire portfolio of these SSGS, and adjusted yearly.

If these accounts sound too wordy or confusing, I have summarized them in the table below.

The CPF interest rate is not fixed

You may have forgotten, or never paid attention to the Euro Debt Crisis, when the European government ran into a debt crisis due to the obligations of their pension system.

We were fortunate that the same thing did not happen in Singapore. With a rough sea globally, the CPF board shielded Singaporeans from the bloodshed in the world financial markets.

But you do need to recognize that CPF has been paying more than what they are supposed to pay you. If you understand how “bonus smoothing” works in a retirement income insurance plan works, you can draw some similarity.

Take an ordinary account return as an example. When the CPF board pays you a 2.5% return, it is composed of the following:

  • 0.6% – a guaranteed 3-month average of local banks’ interest (based on the current rate as Sep 2019).
  • 1.9% – a “bonus” from the government

The CPF has declared these numbers every quarter. But since the CPF has kept this rate unchanged for so long, people thought it was always guaranteed. If you study the CPF historical interest rate, it was reduced from 4.41% to 2.5% in 1999 (post-Asian Financial Crisis) and has remained unchanged until today.

Source: CPF Website

Will CPF change the interest rate in the future?

Through many conversations with my clients, I discovered that there is overwhelming confidence that the government will NEVER change the interest rate as it is too much “political risk”. Even my expatriate clients have a high regard of the Singapore government. That is something we should be proud of.

In my book “FIRE Your Retirement”, I mentioned that the CPF’s success has become its own hurdle. Here is what I wrote:

Although the CPF is still not a perfect system, we can reasonably assume that the CPF will continue to evolve and adapt to new social and economic environments.

However, since CPF is a mandatory scheme, people either don’t bother to understand it, or believe that the system will be sufficient to take care of their retirement. As a result, most people have no idea how much CPF they will have for their retirement and how to utilize it.

On the other hand, homeownership is taken for granted. Because a big chunk of the mortgage loan can be paid by CPF, if not all, many people have no sense of budgeting for their property purchase. As a result, a lot of people have exhausted their CPF savings to purchase property to live in.

Therefore, any tiny tweaks of the CPF system such as reducing the interest rate, and/or postponing the payout age will inevitably result in a public outcry.

The government may think that people need stable returns and protections. But I think they may underestimate the adaptiveness of Singaporeans. Yes, people don’t like change, but if the change is a constant thing in the first place, few will complain.

Just imagine, what if the CPF interest rate was a floating number similar to the car COE price?

People can look after themselves – if they have to!

When you drive in Singapore, it seems that there is a traffic light every 200 meters. Can you imagine roads without traffic rules, where you approach a junction and there’s no traffic light to guide your way?

You may imagine that this will be a road of chaos, confusion and traffic-clogging.

However, let’s take a look at this video of an intersection without any traffic signals in Ethiopia’s capital, Addis Ababa.

Cars wind around one another on a busy highway, while people meander gracefully through the junction without directions from traffic lights. And it all appears to run smoothly.

When you are guided by the traffic light, you trust the system and you subconsciously give up your ability to decide. But following traffic rules did not save the life of the taxi driver and the passenger in the deadly Rochor road Ferrari crash.

What if you know that you are approaching a junction without any traffic lights? You will likely slow down, pay more attention and keep a careful lookout.

You can take care of yourself when you know you are on your own!

Let’s come back to the CPF interest rate. I think it is quite dangerous when people assume and even advocate that they will get a “guaranteed” 4% interest rate for life. This assumption unfairly puts too much pressure and responsibility on the government.

Theoretically, the government can always pay you because they can print money. But in the long run, you have a dead stock market and dormant retail bond market, which in return dampens Singapore’s economy and currency strength.

Always remember, there is no free lunch in the financial market!

We also should not forget that interest rates and your savings accounts are just numbers. It is the purchasing power that is most important. If you think a 4% return is high, you should take a look at the historical rate of the EPF (Employees’ Provident Fund – Malaysia’s CPF equivalent), which is now paying an 6.15% interest rate. But would you prefer a high interest or a strong currency?

Let’s summarise

I hope by now you have a new perspective about the CPF and about planning for your retirement. As you are making decisions for decades to come, don’t jump into conclusions too easily.

If you like this article, comment below or share it.

Be the driver, not a passenger of your own retirement!

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.

  • Where is the composition of 2.5% interest comes from?

    CPF Act in S6(4)(b)(i) states that ‘being a rate of interest which is not less than 2.5% per annum’.

  • Is there a cap on the amount in SA that can earn 4%? Meaning if i transfer 100k from OA to SA. Total SA amount=300k. Do i earn4% on the 300k? Thanks

  • “The marketing was so successful that there was a 360 degree U-turn in public opinion.” — Haha, I think you meant 180 degree.

    “But you do need to recognize that CPF has been paying more than what they are supposed to pay you.” — Nope, CPF is paying exactly what the law (CPF Act) stipulates.

    However, govt can change the law if circumstances warrant it. For laws to stick, of course the people need to be convinced with both hard & heart matter …. otherwise the people can simply vote another govt to change the laws again.

    OA & MA still effectively only compounds at 2.5% and 4% respectively, not 3.5% or 5%. The extra 1% interest will flow into SA and/or RA.

    The max potential RA interest is 6%, not 5%.
    As for annuities, there are quite a few types. For S’pore insurance market, we follow mostly British annuities i.e. return of unconsumed capital & generated interests if pass away early.

    There are also many commercial annuities in other countries that don’t return the generated interests (just like CPF Life). In US there are also annuities that don’t even return unused capital premiums i.e. if policyholder dies 1 day later … too bad if he’s just paid a $500K annuity premium yesterday.

    The “riskier” the annuity, the larger the monthly payouts.

    For annuities, besides how much, if any, is returned upon early death, other “risks” include the continued sufficiency or purchasing power of the payouts, and the longevity & capability of insurer to continue making payouts.

    The “value” of annuities, on the other hand, can be calculated by the DCF of payments from 65 to say 85 or 95.

  • If our govt is using our CPF funds to invest in international companies like Facebook, Amazon, Alibaba or the four biggest banks in the world, ie those China banks.I am the returns should be much higher due to stock prices gain and dividends yield, with China banks dividend yield as high as more than 8.5 per cent.With Amazon share prices rises more than 100 times,.Our govt not only owed shopping malls, banks,industrial factories,offices , transportations,supermarkets,food businesses,properties,and any businesses you name it,they have shares in any kind of business in our homeland.Some businesses are almost monopolised,so I’m sure they can make decent profits,meaning more than the 4 to 5 percent CPF returns.Moreover, if we have 250K in our CPF life,with compound interest about 5% stii can yield about $12,500 annually.With every month withdrawal of about $1,000,the principal amount is intact,so why must it have an account call CPFLife? Singapore is one of the most expensive city in the world.When you compared our HDB subsidy flat with Hong Kong private owned condo or apartments,of course,we are cheaper.But when you compared our private houses with them, we are not cheap either. Our cars,foods and transport are more expensive according to my friends who worked there for more than 15 years.By the way ,some citizens here are extremely tight with their daily life.Why can’t our CPF scheme be more flexible according.Just like someone who earn millions annually and some citizens who earn less than $20,000 annually.We are considered first world country,but not many of us can live like a first world country citizens.

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