CPF --> Interest Rates

Prior to 2008, interest rate for Special, Medisave and Retirement Accounts (SMRA) has been fixed at 4.0%. However, since 1st January 2008, SMRA has been pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%.

To allow CPF members adjust to the new mechanism the SMRA rate has been put under, the Government will maintain the 4.0% floor rate for two years, from 1 January 2008 to 31 December 2009, if the 10YSGS yield plus 1% is below 4%. After 31 December 2009, the 2.5% floor rate will apply for all CPF accounts. This means that the CPF savings earn a minimum risk-free interest of 2.5% guaranteed by the Government. The fear of fluctuating CPF interest rate, which is possible of dropping to 2%, due to the floating aspect was put in place by this 2.5% guarantee.

An additional 1% interest will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). This means that the other $40,000 must come from SA or MA. If you look at the structure of contribution allocation from your total CPF contribution, you will realise that OA has the highest allocation rate of 67%, while SA and MA stands at 14% and 19% respectively (I chose the rate that is applicable to the majority).

Assuming fixed $2,500 monthly salary throughout, total absolute CPF contribution amount is $862.50/mth. Out of this amount, $577.86/mth goes to OA $120.75/mth goes to SA and $163.88/mth goes to MA. Let's put this to further Math.

Assuming CPF interest rate of 3.5% throughout and salary increment of 3%p.a., this case study shows that a CPF member would take about 6 years before accumulating more than $60,000 altogether.

Therefore, CPF members who are most likely to benefit from this extra 1% are those who have been in the workforce for 6 years.

The additional interest received on the OA will go into the member’s Special or Retirement Account to enhance his retirement savings. This means that the additional interest earned will not be available for housing loan repayment nor child(ren)’s education. Instead, it will go into the Special Account which we do not withdraw till retirement. However, if there is more than $30,000, the CPF member may invest the excess of $30,000.

CPF --> Contribution & Allocation Rates

The CPF contributions are allocated to the Ordinary, Special and Medisave Accounts based on the ratio of contributions that varies according to age band, type of ownership and job sector. Contributions are first allocated to the Medisave Account, followed by the Special Account. The balance is then allocated to the Ordinary Account.

Age band: The older you are the lower your CPF contribution rate by yourself and your employer. However, the older you are the higher allocation rate that goes into your Medisave Account. Ordinary Account allocation rate will decrease as you rise up above the age ranks. Once you reach the age of 55, the allocation of your CPF contribution towards Special Account will cease.

Type of ownership: The two categories of ownership here refer to Singapore Citizens and Singapore Permanent Residents (PRs). Singapore Citizens contribute a standard rate across the board, notwithstanding the consideration of job sector. Singapore PRs contribute a lower rate in the initial 2 years.

Job sector: Job Ownership is basically divided into two categories – Non-Pensionable VS Pensionable. Under non-pensionable includes: (1)Private Sector Employees, (2)Government Non-Pensionable Employees, (3)Non-Pensionable employees in Statutory Bodies & Aided Schools. Under pensionable includes: (4)Government Pensionable Employees, (5)Pensionable Employees in Statutory Bodies & Aided Schools

Note(1)
Maximum contribution for the private sector is calculated based on a salary ceiling of $4,500 for both the employer and the employee.

Note(2)
Maximum contribution for Non-Pensionable Employees in Government Ministries and Statutory Bodies & Aided Schools are calculated based on a salary ceiling of $4,500 for both the employer and the employee.

Note(3)
Maximum contribution for Pensionable Employees in Government Ministries and Statutory Bodies & Aided Schools groups are calculated based on a salary ceiling of $6,000 for both the employer and the employee.

Note(4)

SPRs' contribution rate is much complex as CPF board further segregated the SPRs CPF members within those that are pensionable into those working in the Ministries and those working in the statutory boards.

Fixed Deposits (FD) -- updated and effective as of 10th May

In view of this uncertain economic climate, more people are checking out conservative options such as Fixed Deposits. Let's see what are the current rates like. Is there a financial institute out there offering a much wider spread than the average trend? CIMB is currently, should i say, very aggressive in garnering more customers as evidenced by their extremely attractive interest rates and recruiting more people, especially fresh graduates as they prepare to expand their operations right under our nose.

Well, as you can see, our local banks are offering low interest rates of 0.55% for a one-year period. If we look at the bigger picture, they are offering standard interest rates across all amounts from $10,000 to $999,999. The slight variation come from the time factor. Hence, it is a telling sign that the market is so awashed with liquidity and it may get lower given the recent news about Bank of America and Citibank needing more funding. Where do the US government get their money from? That's right - printing more paper money.

About mylittlehandbook

This blog is about life planning. Since we spend most of our time awake making decisions relating to money, it makes sense that we spend a little more time improving our wealth management skills.

However, before being able to conduct a proper planning, we definitely need to know how the economic system that we are living in works. This means the structures, procedures and regulations that the government has put in place. I hope to bring to your awareness by sharing the knowledge and skills, besides the latest information, that I have picked up.

Since “we” range from Singapore citizens to Singapore PRs to our foreigner friends, I hope that through mylittlehandbook I am able to value-add to your current comprehension. Also, I look forward to feedback/comments where in turn you, my friend, enhance my learning experiences through the talent in you. Each of us are experts in our own fields so let’s share our know-how.

Cheers!