The savvy investor knows that CPF forms a key part of their portfolio. CPF is mandatory for all Singaporeans and permanent residents, and there are 3 different accounts that serve different purposes.
The Ordinary Account, or OA, has the most flexibility. Here’s what you need to know about it, and how to make the most of your CPF OA.
When you and your employer make contributions into CPF monthly, a portion flows into your OA. The exact CPF contribution and allocation rate depends on your age.
Your CPF OA money also earns interest. The first $20,000 in your OA earns 3.5% while the rest earns 2.5%, with revisions upwards at age 55.
Now, you’ve probably heard grumbles about how CPF is locked away until retirement age. But your Ordinary Account can actually be used for a variety of purposes even before withdrawal.
Some of these include:
Your OA can go towards a down payment, stamp duties and legal fees. Post purchase, it can also go towards your monthly loan repayments, annual Home Protection Scheme (HPS) premiums for HDB flats. You can also use your OA as a loan to buy vacant land to construct your house.
Your OA can be used to pay for The Dependants’ Protection Scheme (DPS) or for the aforementioned HPS.
You can get an education loan from your OA, which can go towards your, your childrens’, spouse’s, or relative’s education.
You can use your OA to invest in financial products, such as Exchange Traded Funds (ETFs), Unit Trusts and Digital Advisors, Annuities.
OA earns interest of at least 3.5% on the first $20,000 SGD and 2.5% thereafter. These rates may look very attractive compared to bank savings and fixed deposit rates currently on the market. But that doesn’t mean you should have all of your cash in your CPF OA, because you’ll likely get better returns elsewhere - such as through long-term investing.
All that means is that you shouldn’t keep more in your CPF OA than what you absolutely need.
For many people, that means keeping at least the first $20,000 SGD, which they can use to pay for housing. Here’s why:
There’s a 3.5% risk-free interest rate on the first $20,000 SGD
This first $20,000 SGD can also double as an emergency fund for loan repayments
Anything above the first $20,000 SGD will earn less interest and can instead be invested
There’s just one caveat: when you sell a property you’ve paid for with CPF money, you’ll need to pay back what you took out of your account. So that could be money that you used to pay for your down payment and monthly mortgage costs, plus the accrued interest you would have received on your principal amount had you left it in your CPF.
Of course, housing is only one of the reasons you might need your CPF OA funds for. There’s also insurance and education, so remember to consider these options, too!
Before investing your OA money, consider whether transferring money from your OA to your Special Account (SA) might better suit your needs.
The SA earns an interest rate of 4%, with an extra 1% applied to part of the account, depending on how much you have in the other accounts.
Since the OA yields 2.5%, any money you transfer from there to the SA gets 1.5% more. While 1.5% may not seem much, it still beats leaving your cash untouched in the OA. After all, since it’s mandatory to save with CPF, you might as well save in a higher-yielding account.
This option makes sense if you haven’t yet achieved the Full Retirement Sum, or FRS. That’s the amount of savings that will guarantee you a decent monthly payout in your retirement years under CPF Life.
So, your strategy could be to achieve the FRS as soon as possible, and then let the power of compounding work so that you have more money available to you at age 55 for lump sum withdrawal.
But, there are some caveats to look out for:
The SA rate is not set in stone - all CPF interest rates are.
Transfers are permanent and irreversible. So you have to be really sure you can commit to parking that money in the SA for the long term, until at least the age of 55, from which you can.
That moment comes at age 55.
At that point, a Retirement Account, or RA, is formed. This is the account that will fund your CPF Life payouts for the rest of your life. Money from your SA is used to fund the RA. If your SA funds fall short of the FRS, OA funds are used.
You can then withdraw whatever is leftover in your OA.
Note that it’s entirely up to you when (or if) you wish to withdraw the remaining amount. You may also withdraw the remaining money in OA over time as an income stream to supplement your income. If you have no immediate plans for this remaining OA amount, it might be best to leave your money in CPF to continue earning a relatively high interest rate rather than withdrawing it to sit in your bank account. Once you’ve come up with an investment strategy or made other plans, you can withdraw the money at a later date.
CPF has always been designed as a long-term savings scheme, so whatever annual returns your account generates will consistently compound and grow over time. That’ll make a big difference to your account balance years down the road.
So, to wrap it up, here are the key takeaways:
Your OA earns at least 2.5% interest. Not too shabby.
But it’s capable of more. So keep only as much as you need in there for housing expenses, insurance premiums, and education fees.
You can transfer the money to your SA (which gets 4 percent interest). This is especially useful if you want to hit FRS as soon as possible.
For even better potential returns, consider investing your OA money in products like stocks, bonds, annuities, ETFs, and many more.
If you'd like to see how your CPF fits in your overall financial plan, you can always check out our financial planning tool available in the StashAway app.
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