From time to time, we may read in the newspapers that the CPF accounts interest rates will be maintained. For example, the Straits Times recently carried the piece “Minimum interest rates for CPF accounts monies to remain unchanged”, and the Business Times also published “Some CPF accounts to get minimum 4% interest rate extended”.
For the layperson reading this, we may be confused – why are they telling us that the minimum interest rates that we are entitled to are being extended?
What These Articles Are Actually Trying To Tell Us
While some of the headlines could be clearer, these articles are not wrong and in fact delivering an important message.
According to the CPF Act, the CPF Board must declare a rate of interest which “is not less than 2.5% per annum”. This represents the legislated floor rate we receive on our Ordinary Account (OA). And the declarations are done through the local media.
What About The Higher Interest Rates We Receive On Our Special, MediSave And Retirement Accounts?
By definition, the minimum 4.0% per annum earned on our Special Account, MediSave Account and Retirement Account savings is not mandated in the CPF Act.
This is the same for the additional 1% we receive on the first $60,000 of our combined CPF balances (with up to $20,000 from Ordinary Account) as well as the extra additional 1% interest we receive on the first $30,000 after our Retirement Account is opened at age 55.
While the minimums for Special Account, MediSave Account and Retirement Account is not in the CPF Act, the CPF Act does state that the CPF Board “may declare different rates of interest for different part of the amount standing to the credit of a member in the Fund”.
Nevertheless, we don’t expect the minimum interest rates for these CPF accounts to be suddenly removed either as the government has committed to them.
These Are The Minimum Interest Rates – But We Can Also Receive More Than The Minimum
For many of us, it may also feel like the interest rates we get today are the default rates.
However, the CPF interest rates we receive on our CPF savings are not fixed. They are calculated based on a formula. Here’s how much the individual CPF accounts pay us:
|CPF Accounts||Interest Rate Formula||Floor Interest Rate||Review Frequency|
|Ordinary Account (OA)||80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates||2.5% per annum||Quarterly|
|Special Account (SA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|MediSave Account (MA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Quarterly|
|Retirement Account (RA)||12-month average yield of 10-year Singapore Government Securities plus 1%||4.0% per annum||Annually|
The only reason we may think they are the default rates is that interest rates have been so low for such a long time that the formula constantly derives a lower return than the floor rates.
For example, the most recent calculation for the Special Account and MediSave Account in October to December 2020 would yield an interest rate of 2.43% (even lower than the Ordinary Account floor rate) – but we will continue to receive the Special Account and MediSave Account floor rate of 4.0%.
Similarly, the Ordinary Account computation would have resulted in an interest return of 0.57% per annum. But we continue to receive the legislated minimum of 2.5% per annum. [Fictional scenario: The only downside to the floor rate is that our HDB Housing Loan would have been 0.1% more than the floor rate – offering us an attractive 0.67%. But we obviously should not view it that way.]
While it has been this way for a long time, it wasn’t always the case. As you can see from the table below, before 1999, we have received more than 4% on our Ordinary Account balances and over 5% on our Special Account balances.
Going further back, we have received up to 6.5% interest on our Ordinary Account balances in 1986.
Why Are These Reviews Done And Announced?
For the Ordinary Account, the legislated floor rate is 2.5%, and the CPF Board has a responsibility to declare the rate. However, the frequency of these declarations is not found in the CPF Act.
For the Special Account, MediSave Account and Retirement Account, commonly referred to as SMRA, there is no legislated floor rate above the 2.5% level. Since 1 January 2008, the government pegged the interest rates on these accounts to instruments with similar risks – the 12-month average yield of the 10-year Singapore Government Securities plus 1%. At the same time, the government also committed to providing a floor rate of 4.0% on the SMRA accounts. This has been ongoing, and the reviews are meant to inform us that the floor rate will continue. In CPF’s latest announcement, the floor rate will be extended to 31 December 2021.
Looking back, we can understand why the reviews and announcements may be important:
From 1 October 2001 to 2008, the government had committed to the SMRA paying out 1.5% above the Ordinary Account. This was then changed to the current formula but with a similar 4.0% interest floor rate.
From 1 July 1998 to 1 October 2001, the MediSave Account was not part of the government commitment to pay a floor rate of 4.0%. The government had only committed to paying an additional 1.5%, on top of the Ordinary Account interest, on our Special Account and Retirement Account. At the time, the only thing protecting our MediSave Account interest returns was the legislated minimum of 2.5% to be paid on our CPF savings.
Before that, between 1 July 1995 to 1 July 1998, the government commitment was to pay the Special Account and Retirement Account 1.25% above the Ordinary Account interest.
As you can see, the government commitments to different accounts can change, and the announcements serve as timely updates on the CPF floor rates as well as the extension of the floor rates on our Special Account, MediSave Account, and Retirement Account.
The announcements for the interest rates reviews are delivered four times a year (quarterly), about two weeks before the new rates take effect.
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