CPF Basics - Interest Rate and Withdrawal
CPF is a concept that is close to the heart of every Singaporean. From time to time we hear upcoming politicians or government critics bring up many complaints and theories regarding CPF. I have also observed the government and the mainstream media try to reassure the public that the CPF scheme is a good one.
CPF is a pressure point for the government because the average employee sees 20% of his/her hard earned salary get locked away. I initially held a similar view, and thought that I should use as much of CPF to pay for my upcoming HDB flat to enjoy the value of my CPF funds before I turn 55.
However, after reading financial bloggers, and trying to work out the financing for my upcoming flat, I realise that I have many false assumptions about the CPF system (which is a complex one). I thus want to properly understand the CPF system, so that I can make use of it to maximise my savings.
In my view, the following are key basic facts about CPF that all Singaporeans interested in long term planning should keep in mind
1. Interest Rates
CPF is not merely locking up our salary to be returned to us later. CPF actually helps to invest this money and pays interest on it.
The current interest rates are:
Ordinary Account - 2.5% P.A
Special Account - 4% P.A
Medisave Account - 4% P.A.
Retirement Account ( Created on hitting 55 years of age) - 4% P.A
An additional interest of 1% P.A. is paid on the first $60,000 of combined OA and SA balances (but the OA can only contribute $20,000)
After turning 55, there is also additional interest of 1% P.A.on the first $30,000
These are quite solid interest rates that would beat most fixed deposits offered by banks. While I could try to beat this through certain credit card/bank account bonuses, those require additional steps to meet, and may be removed anytime by the bank. This is also of much lower risk than reit/equity investments. Though not the highest returns possible, these are very good returns for no effort and a very low risk (I tend to think that if CPF funds were at risk, the country is in such a bad state that this money may not be useful or relevant)
But, these interest rates are also not fully guaranteed for life, there is a formula for calculating them, and this formula may be changed at any time. Though historically they have stayed constant.
2. Withdrawing CPF monies
Upon reaching 55, the Full Retirement Sum (currently $166,000, but expected to be much higher by the time I am 55) will be deducted from the OA and SA. This will form the Retirement Account which will be used to pay for CPF Life.
CPF Life, which provides for lifetime monthly payments from age 65 onwards. Based on the current full retirement sum of $166,000, one will receive monthly payments of around $1300 for life. There is also an option to contribute a higher amount of $249,000 to CPE Life instead, for monthly payments of around $2000 for life.
The remainder can then be withdrawn from age 55 onwards, or left in CPF to gain interest. The main takeaway is that CPF monies are not lost forever! They will eventually go back to the owner, and with accrued interest, it just takes some time.
However, based on the CPF Life payouts a full withdrawal of CPF would need to wait up to at least 75 years of age (when the CPF Life Scheme has largely paid itself back).
----
Back to my current problem, which is how much of my CPF funds to use in financing my HDB Flat. I am caught between competing considerations of giving up a good interest rate and strong compounding effect, and the inability to full enjoy the money (and the added risk that the CPF scheme may change or I may not survive) for the next 45 years.
Further, if I use CPF to pay for my flat, if i sell the flat later, I must repay CPF with all accrued interest, meaning that, unless I make more than 2.5% returns with that additional liquidity, I am essentially paying a premium to use these funds.