In recent years, CPF has become an increasingly popular topic. For starters, all of us need to understand the scheme as local employees contribute a significant portion of our salary to our CPF accounts each month.
Beyond mandatory contributions from our salary, we can also make voluntary cash top-ups to our CPF accounts. To beef up our retirement nest egg, we can leverage on the Retirement Sum Topping Up (RSTU) Scheme – either by making cash top-ups or transferring our Ordinary Account (OA) balances into our Special Account (SA) or Retirement Account (RA).
Over the past three years, there has been a surge of more than 50% in the amount contributed via the RSTU Scheme. In 2018, RSTU top-ups amounted to $1.99 billion, and this grew to $3 billion by 2020.
While there’s no information on this yet, we think the RSTU contributions in 2021 and 2022 might be even higher. This won’t just be because of the 4.0% floor interest rate that CPF pays on our SA and RA. In fact, we think it’s because of a more important (and timely) role that CPF plays – acting as a safe haven in many ways for us.
Escape High Volatility In The Financial Markets
There has been heightened volatility in the financial markets of late. Most recently, Russia’s invasion of Ukraine has created a lot more uncertainties. The stock market has responded by dipping over 5% in the year-to-date. Since the start of the war, the stock market decreased nearly 13%, before recovering slightly.
It hasn’t just been about the plunges in stock market prices either. With an ongoing war, there is a big unknown for investors. It could easily escalate into a larger war or prolonged over a period of time – no one knows.
Of course, we also had COVID-19 in 2020. While the stock market actually finished positive in 2020 itself, extreme volatility saw the markets giving up nearly a third of its value within just six weeks. There were also numerous spikes and dips along the way to a positive finish in 2020.
For investors who do not wish to be part of such volatile markets, the CPF is a great tool. Our principal investment (i.e. cash top-up) into the scheme is guaranteed, so we don’t have to bear any volatility.
This can be especially useful for investors who are closer to retirement, and may want to lock in our portfolio value. Even for younger investors who do not have a big risk appetite, the CPF can guarantee your principal while also guaranteeing growth with a minimum of 4.0% returns as well.
Beat Near-Zero Interest Rates Since 2008
Looking even further back than 2018, The Global Financial Crisis (GFC) has kept interest rates depressed at near-zero levels since 2008. As such, fixed deposits, bonds and other fixed income products have not been particularly attractive investments.
On the other hand, our CPF Special Account and Retirement Account – backed by a triple A rated government – pays a floor interest rate of 4.0% per annum. Moreover, our returns are also improved by the fact that we receive tax savings on cash top-ups of up to $16,000 a year (or $14,000 prior to 2022) via the RSTU Scheme.
For those of us who also think inflation is a big worry on the horizon, the CPF may be able to manage the situation as well. This is because 1) a common response to combat inflation is a higher interest rate, and 2) because there is flexibility in the CPF scheme to pay more than the current 4.0% floor rate on our SA and RA account.
Interest rates paid on our Special Account balances is the 12-month average yield of 10-year Singapore Government Securities plus 1% OR the 4.0% floor rate. As the current 10-year Singapore Government Securities is yielding about 2.4%, we are entitled to the higher of 3.4% (2.4% + 1.0%) OR 4.0%.
If inflation spirals out of control, we can expect interest rates to rise as well. And, if the 10-year Singapore Government Securities rise above 3.0%, we can expect to receive more than the floor rate on our SA. This can be seen in the years prior to 1999, there were many such instances where our CPF Special Account earned an interest that was higher than 4.0%.
Credit Also Goes To Improved Communications By The CPF Team
Without trying to dredge up old news, we also think that there is a more positive spin around the topic of CPF contribution in recent years. This may be a combination of a better understanding of the CPF system or the fact that it has become more relevant (as highlighted in two earlier points) compared to before.
Whatever the reasons, credit must go to the communications team at CPF trying to educate the public about the pros and cons of topping up our CPF accounts.
Over the past decade, many more financial websites and personal blogs have also entered the scene, painting alternative viewpoints about the CPF scheme. This would have also gone some way to communicating the benefits of the CPF scheme.
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