The Central Provident Fund (CPF) is a retirement savings plan managed by the Government of Singapore, in an effort to ensure that its citizens do not lack for anything after their earning years are past. The CPF, which started off as a mere retirement savings scheme, has developed over the years to become a comprehensive social security system that helps Singaporeans not only to save and grow their money for twilight years, but also to buy a house and in medical expenses.
The most important facet of a savings scheme is the interest the amount accumulates over time. Merely saving a particular amount every month will not help future finances; with the rate of inflation going up every year, it is important that the saved amount also grows. It is with this in mind that the CPF offers steady interest rates on its accounts. Each type of account attracts different rates of interest, as per the significance of that account. The interest earned for various amounts within the accounts is also differential. These interest rates for Ordinary, Special and Medisave accounts are reviewed every 3 months, while that for Retirement Account is reviewed annually. Changes are made to the rate according to the economic situation at the time.
Interest Rates For CPF Accounts:
The current interest rates for the different types of CPF accounts (applicable from July to September 2016 for Ordinary, Special and Medisave accounts and from January to December 2016 for Retirement Account) are as given below:
|Type of account||Annual interest rate|
|Ordinary Account||Up to 3.5%|
|Special Account||Up to 5%|
|Medisave Account||Up to 5%|
|Retirement Account||Up to 5%|
An extra interest of 1% is paid on the first S$60,000 saved by a member cumulatively in their CPF accounts – subject to a maximum of S$20,000 in the Ordinary Account. The above interest rate is inclusive of this extra 1%. Members who are 55 years or older will also receive another 1% extra interest on the first S$30,000 saved cumulatively in all the accounts. This again is subject to a maximum of S$20,000 in the Ordinary Account. This means that senior CPF members, aged 55 or more, will be able to get an interest rate of up to 6% in a year on their savings.
Interest Rate For Ordinary Accounts:
The minimum interest rate for Ordinary Accounts (OA) is 2.5% yearly. If the 3-month average of interest rates of major local banks is higher than 2.5%, then the money in this account will get that higher number as interest rate. So essentially, the interest rate for OA is either 2.5% or the 3-month average rate of banks, whichever is higher.
The interest rate of OA is reviewed every quarter. The rate determined for the July-September quarter was actually just 0.24%, but since the account is mandated to get at least 2.5% interest, the rate has been fixed at that level for the quarter of July 1, 2016 to September 30, 2016.
Interest Rate For Special and Medisave Accounts:
Special and Medisave Accounts (SMA) earn an interest rate that is higher of the following: the existing minimum interest rate of 4% p.a. or 1% more than the 12-month average yield of 10-year Singapore Government Securities (10YSGS). Currently, between July 1, 2016 and September 30, 2016, the rate of interest for SMAs is 4%.
The interest rates for Special and Medisave Accounts are kept the same in every review, which is conducted quarterly. The computed interest rate for the July-September period was only 3.43%, because of which the rate was fixed at 4% for the quarter.
Interest Rate For Retirement Accounts:
A Retirement Account (RA) is created when a CPF member becomes 55 years old. This account earns at least 4% interest rate per year, like the SMAs. The amount deposited in RA is invested in Special Singapore Government Securities (SSGS). These securities receive a coupon rate of either the minimum floor rate of 4%, or 1% more than the 12-month average yield of the 10YSGS for the year, whichever is higher. RA gets an interest rate that is equal to the weighted average interest rate of the entire portfolio of these SSGS.
Rate of interest for RAs computed as the average yield of 10YSGS was 3.39% for the duration of January 1, 2016 to December 31, 2016. Since this is lower than the minimum rate, new SSGS for 2016 will pay a fixed coupon of 4%, and the RA accounts will get the same percentage as interest rate.
All CPF accounts are eligible to get an additional interest rate of 1%, subject to certain conditions. This extra interest is meant as a bonus to encourage everyone to save the CPF amount instead of withdrawing it periodically and spending it off before your actual retirement.
- The first S$60,000 in your CPF balances will earn you this additional interest. Only up to S$20,000 of the balance in OA is allowed to be calculated for this cumulative figure. For instance, if your SMAs have S$42,000 and your OA has a balance of S$21,590, then you are eligible for extra interest of 1% because the total of both these accounts is more than S$60,000. But if your OA has S$35,000 and the SMAs have S$28,000, then you will get the extra interest only for the first S$20,000 of the OA and for the whole amount in the SMA, even if that way the total is less than S$60,000, because the entire amount in OA is not factored in for the calculation. This interest will be given only on the first S$60,000 of the total balance, and not on the entire amount you have saved.
- Account holders who are 55 years or older get another 1% interest, in addition to the 1% interest offered in the case given above, for the first S$30,000 of cumulative balance in their accounts. Here too, only up to S$20,000 is taken into consideration from OA. Effectively, CPF members aged 55 or more will get 2% extra interest for amount of up to S$30,000, 1% extra interest for another S$30,000, and the regular interest rate for the remaining amount. This benefit was introduced in January 2016.
The reason for a ceiling of S$60,000/S$30,000 on total balance is to ensure that everyone gets fair benefit from the fund. As for the S$20,000 cap on OA balance, it is to ensure that a largish corpus is built for your retirement years. OA accounts have less restrictions and withdrawals can be made from it by the members. Which is why the extra interest is deposited in Retirement or Special accounts, so that it is useful to the member after retirement.
Growth Pattern Of Interest Rates:
The interest rates offered for the 4 kinds of accounts has been steady at the current rates for over 15 years now. This is because the computed interest rates have almost always been lower than the minimum threshold.
How Is The Interest Deposited?
The interest rates are calculated every month, but compounded and credited to your respective accounts on a yearly basis. So the interest earned on your OA balance will be credited to your Ordinary Account only, the interest on SMA will go to your Special and Medisave accounts only, and the interest receivable on RA will be credited only to your Retirement Account. If you are older than 55 years, the extra interests earned will be credited to the Retirement Account or the CPF Life Annuity Fund (if the member has opted for it). If you have not yet touched 55 years, then the interest amount will be credited to the Special Account.
The maximum interest that can be earned per year is:
- S$600 for individuals below 55 years
- S$900 for individuals aged 55 or more
In the hierarchy of accounts while deciding the extra 1% interests, priority is given in this order:
The amounts deposited in various CPF accounts are invested in government securities, especially Special Singapore Government Securities and 10-year Singapore Government Securities. These being government bonds, are considered a safe investment and guarantees returns on the money. Market volatility of equities and stocks is avoided through such an investment. By setting minimum interest rate/floor rate for each type of account, the government ensures that savings of the Singaporean public grows adequately and each member has enough money to lead a comfortable retired life.