A Business Times article published last week, titled The retirement advice that worries me the most, featured Christopher Tan, CEO of Providend, sharing his experience of being approached by an insurance agent while having breakfast at a hawker centre.
According to Christopher, the agent’s pitch was that his company offered a “better” product, an investment-linked policy, compared to CPF LIFE. Unsurprisingly, when this claim was challenged, the conversation quickly moved into what I would describe as half-truths used to justify the pitch. I will not go into detail here and you can read the full article yourself.
Unfortunately, this is not an isolated encounter. From my experience, it is not uncommon for some in the financial industry to use CPF as a reference point to convince prospects that they can earn higher returns elsewhere.
Why does this happen? I think there are a few reasons.
Forced Savings & An Underappreciation Of How CPF Actually Works
In Singapore, CPF contributions are mandatory. This is helpful because it forces us to set aside money for future needs, whether for housing, retirement or healthcare.
Beyond our monthly contributions, CPF savings also earn risk-free interest of at least 2.5% per annum in the Ordinary Account and at least 4.0% per annum in the Special, MediSave and Retirement Accounts. Over the long term, this helps Singaporeans build wealth in a disciplined manner with no risk.
The trade-off is that many people with substantial CPF savings may not fully appreciate how CPF actually works. While they may know that they have money in their CPF accounts, they may not understand how CPF interest compounds, how the different accounts serve different purposes, and ultimately, how the system is designed to support them at different stages in life.
Unfortunately, some may dislike CPF because they see it as money being taken away from them, rather than money being set aside for their future needs. This perception creates an opportunity for bad actors in the financial industry to exploit these frustrations. By framing CPF as restrictive or suggesting that these “locked up” funds could have generated far better returns elsewhere, they make investing your CPF savings appear far more compelling than they actually are.
It Goes Beyond ILPs
While the Business Times article highlighted how an agent may try to convince consumers to invest their CPF savings in an ILP for higher returns, this problem is not limited to just insurance. The same fear-based messaging can also exist in other areas of personal finance, such as property.
For example, we have heard of homeowners being advised to sell and buy another property before turning 55, on the basis that CPF will “lock up” their Ordinary Account savings in the Retirement Account once they reach 55.
Again, this is only a half-truth. While it is true that CPF savings may be set aside in the Retirement Account from age 55 to meet the Full Retirement Sum, this does not mean that all CPF monies are suddenly locked away, nor that homeowners must rush into a property transaction before then.
Such advice can be especially dangerous because buying and selling property is a major financial decision with high costs, including stamp duties, agent commissions, renovation costs, mortgage commitments, and other risks. Making a decision solely out of fear that your CPF savings will be “locked up” is not optimal.
Read Also: What You Need To Know About Pledging Your Property To Meet The CPF Full Retirement Sum (FRS)
Swapping The Certainty Of CPF Returns For Potentially Higher Returns
Whether it is an ILP or being encouraged to upgrade your property for “asset progression”, the appeal is usually the same: you are told that your money can generate a potentially higher return compared to leaving it in CPF. On the surface, this may sound reasonable. However, such a simplistic comparison ignores the important trade-off between risk and return.
As a general rule, higher returns usually come with higher risk.
CPF savings earn us a relatively safe return of at least 2.5% per annum in the Ordinary Account and at least 4.0% per annum in the Special Account, MediSave Account and Retirement Account. For someone who values certainty in their retirement planning, transferring our Ordinary Account savings to the Special Account is a decent strategy that can already provide a higher, risk-free return.
Can we earn more than 4.0% per annum elsewhere? Of course. For example, if we are knowledgeable and invest our CPF Ordinary Account savings into the stock market, we could potentially earn a higher return. The keyword, however, is “potentially”. There is also a very real possibility that our investments underperform, or even fall sharply in value.
This example illustrates the risk-return trade-off that many may be overlooking when investing their CPF savings in an investment instrument for potentially higher returns.
Nobody Earns Any Incentives When You Leave Your CPF Untouched
Another often-overlooked advantage of CPF is its cost. When our money sits in CPF, we do not pay sales charges, management fees, platform fees or commissions to earn our returns. The returns are essentially free.
This matters because fees reduce returns over time. While investing our CPF savings into a product that projects 6% per annum may sound attractive, but if total fees take up 2% each year, the actual return could be closer to what our CPF SA already provides, but at a much higher risk.
Another uncomfortable truth is that no one earns a commission when we leave our CPF savings untouched. There is no sales charge when our CPF savings continue earning interest, and no agent is paid when we simply allow CPF LIFE to provide lifelong retirement payouts.
However, when CPF savings are invested, whether into an ILP, a unit trust, or a property transaction, someone in the chain may earn a fee or commission. This does not mean every recommendation to invest CPF savings is wrong. But it does mean consumers need to recognise the incentive structure behind the advice.
When someone tells us that CPF is inferior and that our money can work harder elsewhere, we should ask a simple question: Is this advice really in our best interest, or is there also a sales incentive behind it?
Read Also: Understanding Churning & How It Shows Up In Insurance, Investments, Property & Credit Cards
Photo Credit: DollarsAndSense/Raymond Quek
