Friday, September 16, 2011

Investing with your CPF

YOUNG adults already in the workforce will no doubt be familiar with their CPF (Central Provident Fund) accounts, into which a portion of their monthly salary is automatically squirrelled away, along with a percentage contribution from their employers.

Having surveyed the gamut of asset classes and investment vehicles over the last few months, the Young Investors' Forum takes a look this week at how young working adults can think about investing their CPF savings for the future.

While the prospect of retirement may still be far from the minds of energetic go-getters just scaling the lower rungs of their career ladders, it is only prudent to start preparing for that future today.

Know your CPF

The government bills the CPF as a 'comprehensive social security plan'. Meant to provide working Singaporeans financial security in their old age, the scheme covers retirement, healthcare, home ownership, family protection and asset enhancement.

These aims are met by mandatory monthly sums of money working Singaporeans and their employers channel into each individual's three CPF accounts:

  • The Ordinary Account (OA), which is where the bulk of your monthly contribution goes if you're under 35, and stores monies which can be used to buy property and insurance policies, make financial investments or pay for your own or your children's education.

  • The Special Account (SA) is to accumulate funds for old age and contingencies, which can be used to invest in retirement-related financial products.

  • The Medisave Account's (MA) savings are meant for hospitalisation expenses and approved medical insurance plans.
While entrepreneurs and the self-employed need not contribute to the Ordinary and Special Accounts, they must contribute to the Medisave Account if their yearly net trade income exceeds $6,000.

Without you choosing to invest, CPF savings in all these accounts will earn interest. Funds in the OA earn an interest rate based on the 12-month fixed deposit and month-end savings rates at major local banks, but the CPF Act guarantees a minimum risk-free interest of 2.5 per cent.

For the Special, Medisave (SMA) and Retirement Accounts, which earn an interest rate equal to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus one per cent, the government announced last September that it would keep an interest rate floor of 4 per cent till this December.

Also, the first $60,000 you have across your CPF accounts - with up to $20,000 coming from your OA - earns an extra one per cent interest.

Hence, one possible way to grow your CPF savings is to transfer monies from your OA into your SA, to take advantage of the higher interest rate that uninvested savings in the SA earn. But such a move is irreversible, as fund transfers in the opposite direction are not allowed.

CPF Investment Scheme

As long as you are at least 18 years old, are not bankrupt and have more than $20,000 in your OA or more than $40,000 in your SA, you can tap the CPF Investment Scheme (CPFIS) to grow that 'retirement nest egg'.

The CPF Board runs two separate investment schemes for the OA and the SA, allowing for your CPF savings to be put to work via a wide range of instruments, in the hope of reaping a return above the prevailing interest rate.

The ultimate aim, of course, is still to accumulate wealth for retirement, so any profits made from these investments are still subject to the standard CPF withdrawal rules.

If losses are incurred on your CPF investments, you need not top up the accounts from which the investments were made, but your retirement savings would have shrunk.

Financial planners posit that, as a rule of thumb, a person needs about 70 per cent of his last annual income to keep up his current lifestyle in retirement. CPF savings are meant to cover basic retirement needs and may not meet a person's other lifestyle needs - one key motivation for private savings and investments.

Also worth considering before you decide to start investing your CPF savings are any financial obligations that would require payment from a CPF account. For instance, whether you need to use your OA to make monthly housing payments will help you decide how much of your savings you are willing to channel into investments.

Getting started
The CPFIS's range of investment options include fixed deposits, bonds, annuities, endowment insurance policies, investment-linked insurance products, unit trusts and exchange traded funds (ETFs).

What is available to you under the CPFIS-OA and the CPFIS-SA differ, since the two accounts are meant to help accumulate savings for different purposes.

So, while OA funds can be invested in fund management accounts, shares, property funds, corporate bonds and gold or gold products, SA savings cannot.

Other restrictions you should be aware of before investing your CPF savings include the fact that you may only invest in unit trusts, exchange traded funds and fund management accounts approved by the CPF Board.

And CPF savings can only be used to purchase common shares, Reits and corporate bonds issued by companies incorporated in Singapore and traded on the Singapore Exchange (SGX).

Also, you can put a maximum of only 35 per cent of your investible savings into shares, Reits and corporate bonds, while the cap on gold (including gold ETFs and other gold products) is 10 per cent.

More details on restrictions and possible charges you may incur from the CPFIS and the other financial intermediaries are available at, where you can also calculate how much of your investible CPF savings you have at the moment.

If you intend to use funds from your OA, you will need to apply for a CPF Investment Account with any one of the CPFIS agent banks: DBS, OCBC and UOB. Do note that you can have only one CPF Investment Account at any one time.

Such an account is not needed if you intend to invest from your SA, in which case you can approach investment product providers directly.

Naturally, all the usual caution urged with regard to investing in general will apply to investments made using your CPF savings too.

Any investor must consider his investment time horizon, asset allocation, the risks and returns of each product, and diversification across his portfolio, before committing to an investment - even ones made under the CPFIS.

'No one can guarantee that investments under the CPF Investment Scheme will always be profitable,' the CPF Board states on its website.

'CPF members have to decide for themselves how to invest their savings, and what risks to accept, and exercise prudence and care in investing their CPF savings to ensure their financial well-being after retirement.'

'If they are not confident of investing on their own, they should leave their money in their CPF account which earns interest and is risk-free,' it adds.

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