This article has been updated to reflect the latest upward revision in the monthly CPF Ordinary Wage (OW) ceiling, which will rise to $8,000 by 2026.
Living in Singapore, we can’t ignore our CPF account balances. Each month, we make mandatory CPF contributions of up to 37% of our salary. Over three to four decades in the workforce, our CPF balances can compound to a substantial amount.
While we are younger, more funds are channelled into our Ordinary Account (OA). As we gradually age, a larger proportion is funnelled into our Special Account (SA) and MediSave Account (MA) for our retirement and healthcare needs instead. When we hit 55, a new Retirement Account (RA) is opened for us to set aside our retirement funds for our golden years.
Understanding how the CPF system works, and the interest rates it pays, allows us to maximise the scheme and make better financial decisions.
How Much Interest Do We Earn On Our CPF Balances?
The best part about our CPF contributions is that they start earning a return immediately. We do not need to make any investment decisions nor take on any investment risk to earn a relatively good interest return.
|CPF Account||Interest We Receive (p.a.)|
|Ordinary Account||2.5% (Floor Rate: 2.5%)|
|Special Account||4.04% (Floor Rate: 4.0%)|
|Retirement Account (only opened when we hit 55)||4.0% (Floor Rate: 4.0%)|
|MediSave Account||4.04% (Floor Rate (4.0%)|
In the latest round of CPF interest rates review, our Special and MediSave Accounts (SMA) will earn 4.04%. This is significant, as CPF interest rates for our Special Account and MediSave Account have now increased above the 4.0% floor interest rate established in 2008. More importantly, the last time that we received a higher interest rate than 4.0% on any of our CPF accounts was in June 1999 – almost 25 years ago.
The reason that interest rates on our CPF balances can increase is because it is not a fixed rate. According to the CPF Act, there is a formula that governs the calculation of interest returns on our CPF balances. Given the rapid increase in global interest rate in the past 2 years, it is also perhaps not very surprising that the interest rates calculated in the formula have risen significantly.
In addition, the legislated minimum interest rate is 2.5% per annum. The higher floor rate of 4.0% interest return on our Special Account (SA), Retirement Account (RA) and MediSave Account (MA) is technically not mandated, but it is a commitment that the government has made.
Due to the low interest rate environment in the recent past, we have been paid the legislated minimum interest rate of 2.5% on our OA balances, and the committed floor rate of 4.0% on our SA, RA and MA balances for a long time. As explained, this is why it is so significant that the Special and MediSave Account interest rates have climbed above the floor rate.
Interestingly, the Retirement Account interest rate is still held at 4.0%. This is because the Retirement Account interest rate is reviewed annually, while the Special Account and MediSave Account interest rates are reviewed quarterly (along with the Ordinary Account interest rate). We can expect another round of CPF interest rate reviews in January 2024 – which will likely raise interest rates for our Retirement Account.
|CPF Accounts||Interest Rate Formula||Floor Interest Rate|
|Ordinary Account||80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates||2.5% per annum|
|Special Account||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum|
|Retirement Account||– Weighted average interest rate of all the investments that RA monies are put into
– New savings credited into RA earns the 12-month average yield of 10-year Singapore Government Securities plus 1%
|4.0% per annum|
|MediSave Account||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum|
We Also Receive Extra Interest Rates On Our CPF Balances
Extra Interest Rate
On top of the interest rates paid on our CPF balances, we are also paid an extra interest of 1.0% p.a. on the first $60,000 of our combined CPF balances (with up to $20,000 coming from our OA). This was also implemented in 2008. Such a policy helps those with lower CPF balances compound their balances at a faster rate.
Do note that there is a cap of $20,000 that can come from our OA balances. This means that if we have $40,000 in our OA, and $10,000 in our SA and another $10,000 in our MA, we will not fully benefit from the extra interest rate of 1.0% despite having $60,000 of combined CPF balances.
Only a maximum of $20,000 can come from our OA. Hence, in this scenario, we will receive extra interest on $20,000 from OA, $10,000 from SA and $10,000 from MA.
One other difference is that the extra interest earned on our OA balances will be paid into our Special Account (if we are under 55) or Retirement Account (if we are over 55). The extra interest earned on our SA and MA will flow into the respective accounts.
For the scenario above, here’s what it looks like:
|CPF Account||CPF Balance||Interest Rate We Receive||Extra Interest Rate|
|Ordinary Account||$40,000||2.5%||1.0% on $20,000 (paid into SA)|
|Special Account||$10,000||4.04%||1.0% on $10,000|
|MediSave Account||$10,000||4.04%||1.0% on $10,000|
|Total||$60,000||1.0% on $40,000|
This is why we may read that those under the age of 55 can receive up to 5.0% interest on our CPF balances or that we may earn up to 3.5% on our Ordinary Account balances. These figures are not applied uniformly to our entire CPF balances. Instead, they only apply to the first $60,000 of our CPF balances. That too with restrictions on the first $20,000 coming from our OA.
If global interest rates rise further, these numbers will likely be adjusted upwards during the next interest rate review. In fact, we can already earn up to 5.04% on our Special and MediSave Account balances today.
Additional Extra Interest Rate
For those 55 and above, we will also be paid an additional extra interest of 1.0% on the first $30,000 of combined CPF balances. This is on top of the extra interest on the first $60,000 of combined CPF balances.
The additional extra interest rate is also capped on up to $20,000 that can come from our Ordinary Account.
In another scenario, consider if we had $52,500 in our OA, and $2,500 in our SA, $2,500 in our RA and another $2,500 in our MA. We will first receive the extra interest rate of 1.0% on $2,500 in our RA. As this does not hit the $60,000 threshold, we will then receive the extra interest rate of 1.0% on the $20,000 in our OA, $2,500 in our SA and $2,500 in our MA.
In total, we will receive the extra interest of 1.0% on $27,500 despite having $60,000 in combined CPF savings.
Furthermore, we will receive another 1.0% additional extra interest on $20,000 on our OA, $2,500 on our SA, $2,500 on our RA and $2,500 on our MA. In total, we will receive the additional extra interest of 1.0% $27,500 despite having more than $30,000 in combined CPF savings.
For the scenario above, here’s what it looks like:
|CPF Account||CPF Balance||Interest Rate We Receive||Extra Interest Rate||Additional Extra Interest Rate|
|Ordinary Account||$52,500||2.5%||1.0% on $20,000 (paid into RA)||1.0% on $20,000 (paid into RA)|
|Special Account||$2,500||4.04%||1.0% on $2,500||1.0% on $2,500|
|Retirement Account||$2,500||4.0%||1.0% on $2,500||1.0% on $2,500|
|MediSave Account||$2,500||4.04%||1.0% on $2,500||1.0% on $2,500|
|Total||$60,000||1.0% on $27,500||1.0% on $27,500|
Similar to the point above, this is why we may read that those above 55 can receive up to 6.0% returns on their CPF balances. This is restricted to the first $30,000 of our CPF balances and only $20,000 can come from OA – which usually forms the largest component of our CPF balances.
This article was first written on 24 May 2021 and has been updated.
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