Savings in our CPF accounts earn us a risk-free interest rate that is paid to us by the CPF Board.
The interest we earn depends on which accounts our CPF monies are in. CPF savings in our Ordinary Account (OA) will earn us a minimum rate of 2.5% p.a. while our CPF Special Account (SA), Retirement Account (RA) and MediSave Account (MA) earn us a minimum floor rate of 4.0% p.a.
It’s important to note that the minimum floor rate paid on our CPF savings is what it says – a minimum rate. While we won’t earn less than 2.5% p.a. (OA) or 4.0% p.a. (SA, RA, MA), it’s possible to earn a higher interest rate.
For example, for the period of 1 October 2023 to 31 December 2023, our SA and MA will be earning us an interest of 4.04% p.a., higher than the floor rate of 4.0% p.a. This is because the interest rate for SA & MA is computed based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1% (subject to the current floor interest rate of 4% per annum).
However, savings in our CPF Retirement Account (RA) will continue to earn us 4.0% p.a. during this period. This might be puzzling for some of us, as for the longest time, we had assumed that the interest rate for the CPF Retirement Account would be the same as what is paid on our SA and MA savings.
CPF Retirement Account Interest Rate Is Revised Annually, Not Quarterly
The main thing to note is that while the interest rates for our OA, SA & MA are reviewed quarterly, the rate for our Retirement Account is only reviewed annually.
As such, while SA & MA interest rates will quickly reflect the current market interest rate during an environment when rates are going up quickly, it would take a longer time for the RA to adjust to market interest rates since the rates will only be reviewed and adjusted (if required) once a year.
For example, from November 2021 to October 2022, the computed interest rate for the Retirement Account was 3.47%. Since this is lower than the floor rate of 4.0%, the rate applied for 1 January 2023 to 31 December 2023 is 4.0%.
When looking at the historical rates for CPF, we can see that for 1Q2023, the calculated rate for both SA, MA and RA were the same – at 3.47%.
However, for SA & MA, this subsequently increased to 3.81% in 2Q2023, 4.01% in 3Q2023 and 4.04% for 4Q2023.
It also means that for both 3Q2023 and 4Q2023, SA & MA rates were higher than the floor rate of 4.0%, which means that the higher computed rates will be applied to our SA & MA savings during the period. However, for the RA, since it’s still tied to the lower rate that was determined a year ago (3.47%), thus, it still took the floor rate that is 4.0% until 31 December 2023, even when both SA & MA have already gone above it.
Of course, if interest rates are high and start declining quickly, then the opposite effect will apply, and we may begin to see rates for SA & MA declining first, while RA rates remain higher for a longer while until the annual review.
Since the turn of the millennium, RA interest rates have always been the same as SA & MA until only recently from 3Q2023. However, moving forward, as long as interest rates remain high and stay above the floor rate of 4.0%, we may continue to see such interest rate differential occurrences regularly.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.