If you’re reading this article, chances are, you already know the CPF Special Account interest rate hit 4.01%. The last time our Special Account paid out a higher interest rate, my mom was younger than I am today. To be exact, that was in Jan-Jun 1999 – when our SA was paying 5.91%.
Over the years, we have been big fans of the 1M65 concept – a fuss-free way for Singaporean couples to take advantage of the CPF system to become millionaires. So, it might feel contrarian right now to read an article about why we may want to think twice, or even up to five times, before rushing to top up our Special Account for the higher interest rate.
#1 Earning 4.01% Today Is Not Better Than 4.0% Two Years Ago
Yes – you read that right.
The spread between the CPF Special Account interest rate and other similarly risk-free or minimal risk interest-bearing investments is narrower today.
To show an example, we compare the CPF Special Account interest rates against the risk-free offered today compared to two years ago. As a proxy, we will take the Singapore Government Treasure Bills (T-bills) as the risk-free interest rates that we can all readily access.
|CPF Special Account interest rate||6-month T-bills rate||Spread between CPF SA and 6-month T-bills|
|Today (mid-2023)||4.01% p.a.||3.85% p.a.||0.16% p.a.|
|Two years ago (mid-2021)||4.0% p.a.||0.3% p.a.||3.7% p.a.|
Clearly, the spreads today (i.e. 0.16% p.a.) are much narrower compared to two years ago (i.e. 3.7%). This, brings us to the next point.
#2 Other Safe Investments Can Pay Decent Interest Rates – Without Locking Up Your Savings
The CPF Special Account is often viewed as a fuss-free method to grow our retirement nest egg. Due to the rising interest rate environment, there are other relatively fuss-free and low-risk investments that pay close to 4% – without irreversibly locking our money in the CPF system.
For example, Singapore Government securities, such as the 6-month T-bills and 1-year T-bills, and even the Singapore Savings Bonds (SSB) are good opportunities. Other relatively safe investments include bank fixed deposits, trying to hack high-interest savings accounts and cash management accounts offered by brokerage firms and robo-advisors.
|Where you can grow your money||Potential interest returns|
|CPF Special Account (SA)||4.01% p.a. (Jun to Sep 2023)|
|6-month T-bills||3.85% p.a. (Auctioned on 25 May 2023)|
|1-year T-bills||3.58% p.a. (Auctioned on 25 April 2023)|
|Up to 10-year investment in Singapore Savings Bonds (SSB)||2.82% p.a. (June 2023 issuance)|
|12-month Fixed Deposit Rate||Appx. 3% p.a.|
|Cash management account||Between 3% to 5% (based on risk level)|
Besides, you can always make CPF top-ups if the rates become more attractive. In such instances, though, other products that do not lock up your savings will similarly offer higher interest rates too.
#3 You Are Locking In To CPF Special Account Interest Rates (And CPF Policies)
As mentioned, topping up our CPF Special Account is an irreversible process. We are locked in to the Special Account interest rates – whether it continues to rise higher or stay near the 4.0% rate.
Especially for younger Singaporeans, who may be inexperienced at investing, locking in to 4.0% may without trying to diversify into the stock market may yield a poorer overall return. There are many studies that depict superior returns in the stock market – of nearly 6 p.a. to 7% p.a. – over the long term.
We may also be taking away available cash flow that we can use to start a business if the opportunity arises. Such an endeavour may potentially yield far greater returns, not just monetarily, but satisfaction in life.
Finally, by topping up funds into the CPF system, we are also at the mercy of any policy changes. We’re not trying to fearmonger here. All we’re saying is that policies can change for very valid reasons, such as rising life expectancy and retiring later in life.
#4 Rates Can Go Up, And Rates Can Go Back Down
While the current 4.01% p.a. represents a very insignificant rise in Special Account interest rate, the reality is that rates may go higher, especially in a rising interest rate environment. After all, there was a time when the Special Account was paying 5.91% p.a. (in Jan-Jun 1999) and even 6.5% p.a. (in Jan-Feb 1986).
That’s potentially one attractive reason why we may be thinking about pouring our savings into the CPF scheme.
However, given the current global economic and geopolitical uncertainties, interest rates can just as easily fall back down.
In such a scenario, anyone who has rushed to top-up their Special Account in hopes of achieving an increasingly more attractive interest rate will be disappointed. Worst still, they will see their savings now locked-in to the 4.0% interest return.
That’s not to say that it’s a poor rate. In fact, we explained why this might be an even better reason to top-up our Special Account in our first point. Individually, we must understand our own reasons to top up our Special Account.
#5 Opportunity Cost of Locking Up Your Saving
Finally, we can always lean on the classic reasons to not top up our CPF accounts, regardless of the interest rate on offer.
This is because we’d be locking up our cash savings. If we chance upon a good investment opportunity, be it in stocks, a business or others, we will not have this money. If we find ourselves in a financial crisis, we cannot tap on our CPF savings to tide us and our loved ones through.
Many of us may also be considering transferring our CPF Ordinary Account to our SA. Doing this may hinder our ability to buy our home, especially if we have not already bought one. Even if we have, it may limit our ability to upgrade if we were hoping to do so.
There Are Pros And Cons To CPF Top-Ups, And We Shouldn’t Just Rush For Higher Interest Rates
This article is not meant to discourage anyone from topping up our CPF Special Account. In fact, there are really good reasons to do so, and we have written about it in the past. Some advantages include enjoying a risk-free return with zero volatility, as well as up to $8,000 in tax relief for top-ups to our own CPF accounts and another $8,000 for top-ups to our loved ones’ CPF accounts.
What’s even more impressive is that we’re not just locked into the 4.0% interest rate. Our Special Account also has the special ability to rise when market interest rates rise! Interest rates on our Special Account is “pegged to returns on investments of comparable risk and duration in the market”.
At the same time, we need to make CPF top-ups with our eyes open to the potential limitations of such a decision.
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