If you’ve been following the financial news closely, you may already be aware of the adjustments made to the Central Provident Fund (CPF) interest rates.
Since this topic has sparked much interest and conversation among Singaporeans due to the mixed sentiments, in this article, I will be talking about:
- How the CPF system works.
- Why there’s a buzz involving CPF interest rates.
- What impacts do higher CPF interest rates have?
- How can you optimise your CPF savings?
What are the components of the CPF System?
From housing to healthcare, the CPF touches various aspects of our lives.
As such, Singaporeans have always been interested in CPF and its components.
Let’s break down the system:
#1 Ordinary Account (OA)
Savings in your OA earn either the legislated minimum of 2.5% or the 3-month average of significant local banks’ interest rates, whichever is higher. This rate is adjusted quarterly, providing the potential for higher returns.
#2 Special Account and MediSave Accounts (SA, MA)
Your savings in SA and MA are invested in Special Singapore Government Securities (SSGS).
These accounts earn either 4% per annum or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, depending on which is higher. This rate is adjusted quarterly, ensuring stability and growth potential.
#3 Retirement Account (RA)
If you have an RA, your savings are also invested in SSGS.
The interest credited to your RA is based on the weighted average interest rate of the entire portfolio of these SSGS, adjusted yearly. This approach ensures a balanced strategy to grow your retirement funds.
Why CPF interest rates changes garnered traction
For the first time in 15 years, CPF has made changes to the interest rates for Special Account (SA) and MediSave Account (MA).
These adjustments are set to take effect in Q3 2023, with SA and MA experiencing a slight increase of a 0.01 percentage point, surpassing the 4% mark for the first time since 2008.
On the other hand, the CPF Ordinary Account (OA) interest rate will remain at 2.5% in Q3.
What impacts do higher CPF interest rates have?
While the recent increase in CPF interest rates may seem modest, it carries implications for your financial planning.
Let’s take a closer look:
#1 Housing Financing: Impact on Property Transactions
As a majority of Singaporeans utilize CPF to finance their housing, an increase in the OA interest rate will result in higher accrued interest to be repaid upon selling a property. Consider this factor when planning for future property transactions.
#2 Concessional Interest Rate for HDB Loans: Effect on Mortgage Rates
If you have opted for HDB loans, the concessional interest rate is pegged at 0.1 percentage point above the OA rate. A spike in the OA interest rate would lead to a higher mortgage rate, impacting your monthly repayments.
Given the recent adjustments to SA and MA rates, it’s natural to wonder if the CPF OA rate will follow suit. However, it’s highly unlikely, at least in the foreseeable future. The OA interest rate is tied to the 3-month average of major local banks’ interest rates. Currently, this average stands far below the current 2.5% rate, making an immediate OA rate increase improbable.
How can you optimise your CPF savings?
Understanding the CPF interest rate changes may seem complex. Although some may argue that the rate hike is minimal in the face of inflation and market rates, it’s crucial to comprehend its workings. You can refer to a detailed article I penned on CPF interest rates in 2019.
While I think that it is highly unlikely, at least in the foreseeable future, that CPF OA rate will increase, it is always good to optimize your savings to provide a secure foundation for retirement planning.
Here are some ways:
- Explore CPF Investment Schemes: Elevating Your Returns
Consider investing your CPF savings in approved instruments to potentially achieve higher returns. Explore the available options under CPF investment schemes to make the most of your hard-earned savings.
- Prioritize Financial Literacy: Empowering Your Decision-Making
Build a solid understanding of CPF and its intricacies. By staying updated and familiarizing yourself with various investment options, you can confidently make choices that align with your financial goals.
Remember, financial literacy is the foundation to secure your future. By staying updated and understanding various investment options, you can confidently make choices that dovetail with your financial goals.
If you want to learn a solid retirement and investing framework, I invite you to join my upcoming webinar “FIRE Retirement Secrets”. I will introduce the Financial Freedom framework that I’ve curated from my 15 years of professional experience.
In this “FIRE Retirement Secrets Webinar“, we will delve into:
- Understanding why high income doesn’t guarantee early retirement.
- How to accelerate your journey to FIRE using the Cash Flow Freedom Framework.
- How to navigate market noises and manage financial crises effectively.
- How to construct a robust retirement portfolio with a 5-step process.