Every month, the ritual remains the same: your salary comes in at a discounted rate of 80% and you slump back in defeat as your CPF account balance accumulates. It’s money, but untouchable money – it might be tempting to think it’s the same as not having it at all, right?
Well, not quite. Even with funds locked away in your CPF Ordinary Account (OA), they’re not virtually inaccessible. In fact, if you’re in the market for more investment options, your OA might just come in handy. After all, that money isn’t going to go anywhere – and that extra cash can go a long way in upping one’s investment game.
But how exactly does investing with OA funds work? Should we even be thinking about it, when the regular interest rate is already sitting at 2.5%?
Let’s explore the possibilities before making a decision.
Introducing the CPF Investment Scheme (CPFIS)
CPFIS, born in 1997 (it’s a Gen Z kid!), is an alternative gateway to investing for people who think they can consistently beat the CPF interest rate of 2.5% a month, and perhaps for people who may not have the cash on hand to invest actively in the first place. Of course, there are a set of requirements to fulfill before qualifying for CPFIS:
- Be at least 18 years old;
- Not an undischarged bankrupt;
- Have more than $20,000 in one’s OA; and/or
- Have more than $40,000 in SA.
So, what are our options? As it turns out, there’s a whole long list of investment products that have been approved by CPF for our choosing. These include:
- Unit trusts
- Investment-linked policies
- Life annuities
- Endowment policies
- Singapore Government Bonds (SGBs)
- Treasury bills
- Exchange Traded Funds (ETFs)
- Fund management accounts
- Corporate bonds
- Property funds
- Gold ETFs
- Other gold products: certificates, savings accounts, physical gold
So, the options available are not unlike investing with cash on hand, only that our OA funds are locked away until 55 and 65 years of age.
There are over 200 products to choose from, making it possible to create a diverse enough portfolio to generate more returns for one’s retirement nest egg.
To minimise the risk and potential losses, especially when it comes to investing in shares and gold in particular, there are a few ground rules.
One, only up to 35% of one’s investible savings can be used for stocks, shares, property funds, and corporate bonds.
Two, only up to 10% of one’s investible savings can be used to invest in gold ETFs and other gold products.
Wait – are we investment-ready?
However, with great power comes great responsibility – and all types of investment come with unique risks, never a 100% guarantee of returns.
In 2016, it was reported that more than 80 percent of members who invested their CPF savings via the CPFIS over the past 10 years would have been better off leaving their money in their OA. About 45 percent of members sustained losses over the same period.
However, the reporting methodology was updated for 2016, taking into account cumulative growth over the years, this saw the numbers change: last year, 60% (or 375,000 people) beat 2.5% when accounting for investment growth between 2015 to 2018.
The measurements clues us towards a conclusion: with a longer investment horizon, one can ignore the immediate mood of the market and ride out the short-term fluctuations, netting decent to good investment returns.
But the journey will not be as comforting as the flat 2.5% growth a year the OA affords. For certain investments such as shares, the growth trajectory might be -10% one year, and a growth of 20% the next. So one with the mental fortitude and the luxury of time can ride out the roller-coaster.
However, it’s worth saying that rides can derail and never recover; time in no way protects one from all the risks associated with investment failure.
This is especially pertinent as we are in the longest ever bull market of over 10 years. This means the market as a whole has been performing for a record period of time.
It’s worth noting the 60% of people who have beaten the OA’s rate has been doing so under a favourable investment climate. A fuller picture of CPF investments will probably be revealed once we revisit the results after a full market cycle.
Markets are cyclical. It’s not a question of if a recession will hit, but when. And when it does, investors (and their investments) have to be strong enough to be able to ride it out.
It depends on our goals
At the end of the day, CPFIS is not a compulsory scheme to partake in. It is thus up to the discretion of the individual Singaporean. It may fit into one’s financial planning on the road to retirement or it might not. Let’s take a look at different scenarios why a person would not want invest via CPFIS.
(1) You are nearing your retirement goal
With only six years or less left before retirement milestones, it will be even more risky to begin any CPF investments. Once again, consider that a full market cycle – with growth and crash – typically lasts five to six years on average. Without an investment time frame longer than this, a recession could coincide when you are retiring, forcing you to push back your plans.
As you have to select your CPF LIFE retirement scheme and withdraw a lump sum at 55, this means from the age of 49 onwards, this point has to be carefully considered.
(2) Your cash investments already meet your goals
If you have an existing portfolio of cash investments that’s is on track to meet you retirement goals. In that instance, there’s no need to take additional risk with your OA funds. We advocate that investments should always be tied to goals.
In the event that you mess up your cash investments, you’ll be thankful for the reliability of your OA funds. Imagine a retirement scenario if a person had failed in both his cash and CPF investments – what will he have left at age 55 or 65?
(3) You don’t like the idea of risk
CPF interest rates are good. A rate of return of 2.5% easily beats bank interest rates of, say, 1.85% (and even this rate demands minimum deposits).
And SA interest rates are even better, sitting at 4%. You have the option to transfer your OA funds to your SA account. It is almost impossible to find an investment product anywhere that has near zero risk (CPF rules can change), yet guarantees near equity levels of returns.
Things to consider
Here is an additional bonus point to consider if you are thinking about utilising CPFIS for a richer retirement:
From Oct 2020, commission charges for CPFIS investments will be abolished. Investment wrap charges – such as Asset Under Management fees – will also be lowered, thus reducing the cost of investing through CPFIS.
|Before Oct 2018||From Oct 1 2018||From Oct 1 2020|
|Sales charge (for new CPFIS purchases)||3%||1.5%||0%|
|Wrap fee (for new/existing accounts)||1%||0.7%||0.4%|
But in the end consider your personal risk appetite, current financial situation, and personal investment knowledge and acumen.
With the lowering of sales charges, coupled with murmurs of a possible recession in 2020, it might be prudent to adopt a wait-and-see approach if one is considering dabbling with investing with their CPF investments. One luxury CPF investing provides is the rare occasion that you are still rewarded for not doing anything with your money, as your funds are still enjoying a 2.5% growth within your OA.
This strategy reduces the risk of entering a too high investment price, and one can save on the sales charges once the new rules kick in.
Having that much money waiting for you in your golden years means worrying less about things like going back to work even after age 65 or even depending on your children in old age. It all depends on your personal goals at the moment, and what you hope to achieve in the future.