Last Sunday, I saw an advertisement in the Sunday Times by the CPF board. Inside this CPF advertisement, the CPF board tells us that we can earn more interest by transferring funds from our Ordinary Account (OA) to the Special Account (SA).
It was mentioned that the SA earns an interest rate that is 1.5% higher than the OA.
Before you decide to do that, do bear in mind the following points:
- The transfer is irreversible, so you won’t be able to tap the funds for housing and other purposes in the future.
- Monies in the SA have limited investment options compared to those in the OA. Only selected unit trusts are available and you can’t invest in shares.
- The OA is pegged to a weighted average of savings deposit and 1 year fixed deposit rates, subject to the CPF guaranteed floor rate of 2.5%..
- In the past, the rate of SA is pegged to OA+1.5%. Now, the SA rate is pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. The average yield of the 10YSGS over one year, from 1 June 2007 to 31 May 2008, plus 1% works out to be 3.65%.
- The Government will maintain the 4% floor rate for two years (from 1 Jan 08) if the 10YSGS yield plus 1% is below 4%. After two years, the 2.5% floor rate will apply.
What this means is that it is possible for SA to give less than 4% p.a. interest. Here’s the historical yield for the 10YSGS:
- 1998 – 4.48%
- 1999 – 4.56%
- 2000 – 4.09%
- 2001 – 3.97%
- 2002 – 2.55%
- 2003 – 3.75%
- 2004 – 2.58%
- 2005 – 3.21%
- 2006 – 3.05%
- 2007 – 2.68%
- 2008 – 3.17%
Based on the rates, you would have received 3.55%, 3.58% and 3.68% interest in years 2002, 2004 and 2007 respectively. That is just 1% higher than the 2.5% you would have earned in the OA.
Personally, if I have excess funds in the OA and I am many years from retirement, I would rather invest it than move it to the SA since there is a good chance the investment will return more than 3-5%.
On the other hand, a person who is very close to 55 and has excess funds in his or her OA (that he or she doesn’t intend to use) can consider the transfer option for a portion of the funds.