We have been in a low interest rate environment since the global financial crisis (GFC) of 2007–2008. Interest rates on our savings accounts are close to zero, and fixed deposit rates have generally yielded under 2% for more than a decade.
This may have encouraged some, particularly the more risk-averse, to top up their CPF Ordinary and Special Savings accounts to enjoy the higher rates of 2.5% and 4%, respectively. Naturally, topping up your CPF seemed like a good financial decision because there were few comparable investment products that could generate the respective CPF returns or higher at a similarly low risk.
However, that rhetoric has changed this year as the average ten-year interest rates on the Singapore Savings Bonds (SSB) started climbing above the 2.5% yardstick in tandem with the overall rise in interest rates globally. In the latest September issue of the SSB (SBSEP22 GX22090Z), the first-year and average ten-year interest rates are 2.63% and 2.80%, respectively.
On first glance, investing in the SSB may seem to be more attractive than topping up your CPF accounts due to the higher interest returns. However, is there more to it than meets the eye? We shall discuss some of the benefits and drawbacks of investing in the SSB and topping up your CPF based on the following five factors.
#1 Use Case Of Funds
The Singapore Savings Bond (SSB) is meant to encourage long-term investing. It cannot be bought or sold in the open market, traded on SGX, or pledged as collateral. Therefore, there is only one use case for investing in the SSB, which would be to collect the coupon payments.
On the other hand, there are three ways that you can invest in your CPF accounts by making a cash top-up. Each account serves a specific purpose.
i – Retirement Sum Topping-Up scheme (RSTU)
Under the Retirement Sum Topping-Up scheme (RSTU), you make a cash top-up to either your Special Account (SA) if you are below 55 or to your Retirement Account (RA) if you are 55 and above to earn 4% interest on your funds.
The money in this account is meant for your retirement needs and will be used to pay the premium for your CPF LIFE plan. You may also invest in investment products approved under the CPF Investment Scheme (CPFIS) after setting aside $40,000.
ii – Voluntary Housing Refund
You could top-up your Ordinary Account (OA) through the voluntary housing refund scheme if you have used your CPF funds to finance your residential property purchase to earn a 2.5% interest.
The money in this account is intended for your retirement needs, but it can also be used for other short-term expenses such as housing. You may also invest in the CPFIS-approved products using your OA savings after setting aside $20,000.
iii – Medisave Account Top-Up
The last account that you can top is your Medisave account (MA), which also yields 4% interest. The money in this account is meant to help you pay for your healthcare expenses such as outpatient treatments, hospitalisation, long-term care, and insurance premiums.
Summary: Based on the allowed use cases of the funds, there is more flexibility with the CPF accounts than with the SSB, which can only be used to collect coupon payments for the full loan tenor. Whereas, while we may top up our CPF accounts to earn the higher interest offered for keeping our funds untouched, we could still choose to use the CPF funds for other purposes allowed under each of the three accounts. This makes CPF top-ups more attractive than SSB.
#2 Calculation of Interest Rates: Simple Vs Compound
The interest rates on the SSB are fixed and locked in at the time of issuance. The simple interest rates are determined based on the average SGS yields from the previous month and will “step up” each year, allowing you to earn a higher coupon (average interest rate) on your initial investment the longer you hold.
As for the CPF accounts, the interest rate calculation varies between the OA and SA/MA accounts.
The interest rate for the OA account is computed based on the 3-month average of major local banks’ interest rates, subjected to the legislated minimum interest of 2.5% per annum.
As for the SA/MA accounts, the interest rate is computed based on the 12-month average yield of 10-year SGS plus 1%, subjected to the legislated minimum interest of 4% per annum.
However, unlike the SSB, the CPF interest is computed monthly and compounded annually.
Summary: A simple interest calculation like the one used for the SSB is favourable for borrowers. However, as investors, we are better off with an investment that gives compound interest like CPF. Compounded interest will allow us to grow our wealth more exponentially over time than simple interest because the interest that we earn each year, is added to the principal, making our balance grow at an increasing rate. Therefore, a CPF top-up is the better choice based on this criterion.
#3 Time Needed To Cash Out
You can enjoy the investment returns from the SSB in cash every 6 months (or twice a year) from issuance. Furthermore, the SSB can be redeemed either upon the maturity of the bond after 10 years or in any given month.
Though there is no penalty for the early redemption, which must be in multiples of $500, there is a $2 transaction fee that will be incurred for the early redemption request. Nevertheless, you will be able to receive the principal amount and the accrued interest on the redemption amount by the second business day of the next month.
CPF members who reach their Full Retirement Sum (FRS) at age 55 can withdraw any amount above it, anytime. Otherwise, if you have not met the FRS, you can only withdraw up to $5,000, depending on your birth year.
Furthermore, CPF members born in 1958 and after can withdraw up to 20% of their RA savings (less the $5,000 withdrawal) from age 65, while CPF members born in 1957 can withdraw up to 10% of their RA savings.
Summary: If we judge based on the liquidity of the investment, or how quickly we can cash out our money, then the SSB comes out on top. Investors would not only be able to enjoy immediate returns on the SSB investment, but they could also redeem the investment quickly and without any financial loss before the full loan tenor. As for CPF investments, a portion of our funds will be held up as part of the FRS and only any amount above this can be withdrawn after age 55. Therefore, investments in CPF could be highly illiquid.
#4 Tax Relief
Though there is no tax relief for investing in the SSB, the coupon returns are tax exempt.
From 1 January 2022, you can receive tax relief of up to $8,000 per calendar year for CPF top-ups for your SA/RA under the RSTU and your MA. Additionally, you can get another $8,000 in tax relief when you top up your loved ones’ SA/RA and/or MA.
Summary: Though the full investment return from the SSB is tax exempt, you would not be eligible to receive any tax relief on it. On the other hand, if you top up your CPF accounts and have not reached your Full Retirement Sum (FRS) and Basic Healthcare Sum (BHS) limits, you could receive $8,000 in tax relief per calendar year. Thus, from a tax standpoint, it is more beneficial to top up your CPF accounts than invest in the SSB.
#5 Investment Protection From Creditors’ Claims
There is no protection accorded to SSB investments from creditors in the event of a bankruptcy proceeding.
Given that the CPF funds are meant for members’ basic retirement needs, the monies are protected under the CPF Act from claims by creditors. This is done to prevent members’ retirement savings from being depleted due to bad debts.
Summary: Though bankruptcy is unlikely for most of us, it is comforting to know that your CPF money is secure and protected from creditors’ claims. This is another plus point for topping up your CPF as opposed to investing in SSB.
Which Is The Best Investment? SSB Or CPF
A quick summary based on the above factors.
|Use Case Of Funds||Single use to collect coupon payments||Multiple uses. Can use to earn interest on untouched funds, invest excess amount, or use for housing or medical expense.|
|Calculation of Interest Rates||Simple Interest||Compound Interest|
|Time Needed To Cash Out||Can receive coupon payments in cash every 6 months and redeem funds within second business day of the following month||Excess amount of the FRS based on age cohort at age 55 and up to 20% of RA savings for CPF members born in 1958 and after|
|Tax Relief||No but returns are tax exempt||Yes, but limited to $8,000 for self-top-up and another $8,000 for loved ones’ top-ups|
|Protection From Creditors’ Claims||No||Yes|
Both the SSB and the CPF serve different investment needs of investors.
An investor who wants full flexibility with his money without much risk will find the SSB a suitable investment to park their reserve cash. Furthermore, investors seeking passive investments to supplement their cash flow needs may also find the SSB suitable given that the coupon payments are paid out in cash every 6 months.
Contrastingly, an investor with a longer investment horizon may instead want to top up their CPF accounts to take advantage of the compounded interest and the annual tax relief that they could get. At the end of the day, we must understand that the CPF savings are meant for one’s retirement needs and for the purchase of the CPF LIFE plan. Hence, as we can only take out any sums in excess of the FRS, it is possible that we may not be able to take out any sum of money that we top up.
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