Everyone in Singapore with CPF should be fairly familiar with the different accounts and how each individual account works. It is also common knowledge that the Singapore government provides risk-free guaranteed interest rates for everyone's CPF deposits, with a current base rate of 2.5% pa for Ordinary Account and 4% for Special Account and Medisave Account.
Considering that the 12-month-tenure fixed deposit interest rates in local banks are only around a pitifully low 0.5% pa, it is fair to say that the government does keep Singpaporeans' interests closely in mind.
Still, if we look at it from the perspective of an investment, the annualized rate of return of CPF, especially OA, appears much less appealing. As a result, the CPF Investment Scheme, or CPFIS in short, is put in place to allow Singaporeans to invest part of their CPF savings in a range of investment instruments. The hope is to earn investment returns higher than the current CPF interests, to accumulate more funds in their CPF by the time they retire.
What is CPF Investment Scheme (CPFIS)?
CPFIS allows people the option to invest some of the savings in their CPF OA and SA accounts. Specifically, one can invest any balance in OA above $20k and/or any balance in SA above $40k.
This sum of money invested no longer enjoys the CPF guaranteed interest rates. Instead, your return will depend on how much you get from your own investment. Your investment return might well exceed the CPF interest rates, but it could also be less or even negative. The golden rule about investment always applies: The higher the potential return, the greater the risk you will have to bear.
Based on your own risk tolerance and preferences, CPFIS investors can choose from a variety of investment products, such as stocks, government and corporate bonds, unit trusts, insurance products, ETF, gold and so on.
Up to 35% of OA's investable savings can buy into shares, property funds or corporate bonds, while only 10% is allowed for gold ETFs and other gold products. You can refer to the table below for a more detailed summary of the different product categories allowed for CPFIS. (For the complete list of products you can buy with your CPF, please refer to CPF website.)
As you can see, there are more choices for you when you invest with your OA savings. Moreover, given that the CPF OA interest rate is much lower than that of SA, it naturally makes more sense to utilize your OA money over SA to invest.
Furthermore, in order to reduce the costs of CPFIS, the government has removed the sales fee for CPFIS purchases of unit trusts or insurance ILPs altogether. That means 100% of the CPF money you put in will be used to buy into the unit trusts you select, without being diluted by insurance agents or broker companies in the sales process. The wrap fee for wrap accounts has also been significantly reduced and is capped at only 0.4% pa.
How to invest your CPF through us?
As one of the CPFIS-approved service providers, we provide a wide range of unit trust products for people who want to invest their CPF monies. Compared to investing directly into shares or bonds, unit trusts could significantly reduce your investment risk by investing into diversified portfolios. You also get to tap on the expertise of dedicated fund managers who constantly monitor market movements and adjust investment strategies on your behalf. This is especially helpful for people who are less investment-savvy or simply too busy to monitor their investment performance all the time.
As mentioned above, there is no sales charge (0%) when buying unit trusts under CPFIS, and reduced the wrap fee to only 0.4% pa. Likewise for us, we do not charge CPFIS investors any other fees that might in any way reduce their profit potential. The only cost applicable is the fund management fees charged by the unit trust fund managers. Such low investment cost is something that you simply cannot expect when investing with cash.
In addition, there is absolutely no lock-up period for doing CPF investment with us, so that you can partially or fully withdraw your investments anytime at no cost to meet your other immediate needs.
Still, it is always a good habit to understand the details of whichever product you intend to invest in, just to make sure that you avoid any unnecessary misunderstandings.
Also, when choosing which unit trusts to buy, we should always bear in mind the risk level you are willing to accept, rather than solely focus any unit trust's historical returns.
Finally, once you kickstart your investment, you should also track the investment performance of your unit trusts regularly. Our financial advisers will review with you at regular intervals and help you make adjustments when deemed fit.
Can you really beat CPF interest rates by investing?
This is a million-dollar question that everyone wants to know. Yet, it is impossible to say for sure, as investment return depends on too many factors, most of which we are unable to predict. Also, depending on each person's investment choice and timing, the actual return will inevitably vary from person to person.
However, through the historical data disclosed on CPF website, we may be able to gain a glimpse of the big picture as reference.
Source: CPF website, The Total Profits/Losses for Investments Held Under CPFIS-OA for the Period Ended 30 September 2020
The chart above shows the actual returns of all CPFIS-OA investors till October 2019 and compares them with guaranteed OA interest rate of 2.5%. From October 2019 to September 2020, half of the investors managed an investment return that beats the OA interest rate, while the other half underperformed or even suffered losses.
Over a longer time horizon of 5 years, the proportion of CPFIS-OA investors that beat 2.5% rises to 66%. This is in line with the general rule that investment return tends to be more stable over a longer period.
Source: CPF website, Third Quarter 2020 Performance & Risk-Monitoring Report for CPFIS-Included Unit Trusts & Investment-Linked Insurance Products
In another set of data, the average annual return for CPF-included unit trusts was 3.43% pa over the past three years leading up to 30 September 2020, while that for CPFIS-included ILPs was 3.83% pa, both higher than OA's 2.5%.Although there are still many people who do not manage to get desirable returns, the whole picture looks promising. Bear in mind that sales charge of up to 1.5% and wrap fee of up to 0.7% were still charged on the investments. With the fees now removed or reduced, it is perfectly rational to expect generally better net returns on CPF investments, and that a much higher proportion of investors will be able to beat the CPF OA interest rate.
Conclusion
With the much-friendlier fee structure, the CPFIS is able to keep more investment returns to the investors themselves, thus boosting their retirement savings in the long run.
Nevertheless, investment is always accompanied by risks. Generally speaking, CPF investment is more suitable to people who have an at least moderate risk tolerance level and those who do not have immediate needs for their CPF funds.
If you are about to reach retirement age, or if you intend to use a large amount of your CPF savings (e.g. buying a house) in the short term, it is more advisable to keep your money within CPF in order to avoid the financial strain that might arise due to possible short-term market fluctuations.
If you would like to know more about CPF investment scheme and CPFIS-approved insurance products, please leave a comment on our blog or our facebook page. Our experienced advisers will get back to you as soon as we can :)
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