According to CPF, more than 200,000 Singaporeans made top-ups worth $3.5 billion to their own or their loved ones’ retirement savings in the first three quarters of 2022. This irreversible action was seen as an effective way to enhance retirement savings in the previous low-interest rate environment.
This narrative started to change in the beginning of 2022 as the US Federal Reserve (the Fed) reversed its monetary stance from quantitative easing to quantitative tightening (in other words, it started to raise interest rates) to control the high inflation, which reached a 40-year high.
Since global trends have a large influence on our local interest rates, this has undoubtedly affected us as well. While we may have to adjust to higher borrowing costs as homeowners, we also have the opportunity to benefit as savers by investing in cash investments that give high yields. This provides us with more options beyond CPF to safely grow our investments with greater flexibility in 2023.
First OF All, How Much Can You Earn On Your CPF Savings?
The floor interest rates on CPF savings, which comprise Ordinary Account (OA), Special Account (SA), and Medisave Account (MA), are between 2.5% and 4% per annum, respectively.
Additionally, if you’re under 55 years old, you can earn up to a 5% interest rate p.a. on the first $60,000 of your combined CPF balances (capped at $20,000 for OA at an interest rate of up to 3.5% p.a.). On the other hand, if you’re 55 years old or older, you can earn an interest rate of up to 6% p.a. on the first $30,000 of your combined CPF balances and up to 5% p.a. on the next $30,000.
Why The CPF Interest Rates May Not Be That Attractive In 2023
While the CPF rates have been attractive over the last decade due to the prolonged period of low global interest rates, they have become less so in 2023. This change can be attributed to the Fed raising its borrowing rates 10 times within a span of 14 months, starting from 0-0.25% in March 2022 and reaching 5-5.25% by May 2023.
Unlike the Fed, the Monetary Authority of Singapore (MAS) – Singapore’s central bank, does not set interest rates. Instead, it adopts an exchange rate policy as its only monetary policy to maintain price stability. Consequently, our local rates, using the SORA as a benchmark, have also risen alongside the US rates, from under 1% in March 2022 to above 3.5% as of May 2023.
As a result, the gap between the returns from some of the low-risk investment products and the CPF rates, which have stayed unchanged, is now narrower. This, in turn, opens up a broader range of investments that you can consider to grow your investments without compromising the flexibility of your funds.
Where Else Can You Invest
Assuming you have at least $60,000 in your CPF to take advantage of the highest interest rates, here are some other options that you can consider placing your cash savings in 2023 as opposed to topping up your CPF account.
#1 High-Interest Savings Accounts And Fixed Deposits
Savings accounts and fixed deposits represent some of the lowest-hanging fruits from which you can easily earn higher yields in 2023 without assuming additional risks. These products, which are often capital-guaranteed, offer simplicity and ease of investment, regardless of your investment acumen.
One way you can maximise the returns on your savings is to consider switching from a traditional savings account that pays a 0.05% interest rate p.a. to alternative savings accounts such as the CIMB StarSaver, the UOB Stash Account, or a savings account with the digital banks.
Alternatively, you could also consider a high-interest savings account that offers a bonus interest rate of above 4%, provided you fulfil certain conditions like salary credit, credit card spending, and the purchase of investment products. By making this simple switch, you can easily earn more while still retaining flexibility over the use of your funds whenever you need it.
However, if liquidity isn’t your biggest concern, then a fixed deposit account could offer comparable rates to CPF. While most banks offer varying term periods, you could typically earn higher rates, the longer the duration.
Below is a non-exhaustive list of savings and fixed deposit accounts that offer attractive interest rates as comparable at least to the CPF floor interest rate of 2.5%.
|Cash Savings Acccount|
|Bank Account||Interest Rates (%) p.a.||Conditions|
|CIMB StarSaver||Up to 3.5||Minimum deposit of $1,000|
|Mari Savings||Up to 2.5||Account opening currently on an invite-only basis|
|UOB Stash||Up to 5.00||Need to maintain or grow monthly average balance of at least $10,000|
|High Yield Savings Account|
|Bank Account||Interest Rates (%) p.a.||Conditions|
|DBS Multiplier||Up to 4.1||Applies to the first $100,000 depending on eligible transactions and the number of categories|
|OCBC 360||Up to 7.65||Applies to the first $100,000. Requires credit salary plus minimum spending on the different categories|
|UOB One||Up to 7.8||Applies to the first $100,000. Requires minimum monthly credit card spending of $500 and either salary credit or Giro transactions|
|CIMB FastSaver||Up to 4.20||No limit. Can earn lower rates without any conditions, otherwise spend minimum $300 on credit card and buy investment/insurance|
|Fixed Deposit Accounts (For A 12-Month Tenor)|
|Bank||Interest Rates (%) p.a.||Conditions|
|RHB||3.50 – 3.55||Minimum deposit of $20,000|
|Bank Of China||3.35||Minimum deposit of $5,000|
|CIMB||3.35 – 3.40||Minimum deposit of $1,000|
|Maybank||3.90||Minimum deposit of $20,000|
*Rates are accurate as of 23 May 2023.
#2 Government Bonds
Another way that you can earn stable returns for a fixed term is by investing in Singapore government bonds. The Singapore government is accorded the highest credit rating of AAA from international credit rating agencies. This should provide credible assurance that bonds issued and backed by the government carry a low risk of default.
Traditionally, government bonds are considered low-risk investments, and as such, they also attract low yields. However, in the current rising interest rate environment, the yields on government bonds have risen to above 3%, making them an appealing investment choice.
One of the two more popular government bonds is the Treasury bill (or T-bill), which is suitable if you have a short investment horizon of between 6 months and 1 year. The other is the Singapore Savings Bonds (SSBs), which are suitable if you have a longer investment horizon as the bonds have a 10-year maturity period. For instance, the latest 6-Month T-bill (BS23109E) that was issued on 16 May 2023 had a cut-off yield of 3.78% p.a., while the SSB (GX23060E) for June 2023, has a 10-year average return of 2.81% p.a.
#3 Money Market And Short Duration Bond Funds
Generally, investors would expect to receive higher yields as they hold their investments for longer periods to compensate for increased uncertainty. This relationship is typically represented by an upward-sloping yield curve.
However, the sharp increase in US Fed fund rates and persistent economic uncertainties have led to short-term US Treasury yields being higher than longer-term yields. This is also known as an inversion of the yield curve, as depicted in the graph below. For instance, the 2-Year US T-bill currently yields 4.35%, while the 10-Year rate stands at 3.72%.
Investors can take advantage of these elevated short-term interest rates by considering investments in money market or short duration bond funds. These funds invest in low-risk, short-term debt issued by governments, financial institutions, and corporations. The maturity period of these debts typically ranges from one day to one year, but is often less than 90 days.
An example of a money market fund is the LionGlobal SGD Money Market Fund, which offers a yield to maturity of 3.78% and a weighted duration of 0.22 years. Another option is the United SGD Fund, a short duration bond fund with a yield to maturity of 4.99% and a weighted duration of 1.21 years.
While some funds may allow you to invest directly, like the United SGD Fund, others may require you to go through an intermediary. Fortunately, you can easily invest in such funds with a cash management account offered by many brokerages at zero commission costs.
#4 Endowment Policies
Endowment policies, particularly those with short maturities, have gained popularity among investors recently as an appealing alternative to fixed deposits. While traditional endowment policies typically span a 10-year term, these shorter-term endowment policies have a maturity period of between 1 and 5 years.
Furthermore, these single-premium short-term endowment policies also offer a principal guarantee and attractive interest rates of between 3 and 4% p.a. Also, unlike bonds, where you may receive the interest payments periodically, endowment policies issue the principal and interest as a lump sum upon maturity. Therefore, they are not as practical if you seek steady cashflow.
It’s also important to note that any request for premature withdrawal on your endowment policy may result in high surrender charges, unlike fixed deposits or government bonds. Therefore, it is crucial to consider your investment horizon and be prepared to commit to the specified term period when investing in endowment policies.
While Having Flexibility Over Your Savings Is Important, A RSTU Could Also Be Practical
The highlighted cash investments offer the combined benefits of high returns and flexible control over your savings due to their short maturity. This becomes particularly valuable during emergencies, when you require immediate access to the funds.
Additionally, as the economy heads towards a possible recession, maintaining liquidity and having readily available cash savings can prove advantageous. It allows you to capitalise on any potential market opportunities that may arise.
Nevertheless, it remains beneficial to consider making cash top-ups under the retirement sum topping-up scheme. By doing so, you can enjoy tax relief of up to $16,000 for cash top-ups made to yourself and your loved ones in each calendar year. To illustrate, if your earned income for the year amounts to $80,000, making the maximum $16,000 cash top-up could result in you enjoying $1,120 in tax savings on top of the compounded interest rates that you will receive on the CPF savings.
Ultimately, it’s important to weigh your options based on your financial objectives and capabilities rather than solely focusing on returns.
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