Could Making CPF Top Ups Be The Safest Investment For Singaporeans In 2022?

In the financial markets, 2022 has thus far not turned out the way most expect it to be. The Ukraine-Russia war, record inflation, sharp spike in interest rates from The Federal Reserve Board plus the same problem that has plagued us since 2020 – COVID-19 – has made 2022 one of the most volatile years in the financial markets.

Besides the crypto crash earlier in the year, the traditional financial market has also seen a significant decline. Since the start of 2022, the S&P 500 is down about 20% while the Nasdaq-100 is down about 28%.

Even bonds, traditionally seen as a safe haven for investors, have performed disappointingly as interest rates increase. The ABF Singapore Bond Index Fund, a bond ETF that invests mainly in bonds issued by the Singapore government or Singapore government-linked entities, is down about 8% over the past 12 months.

With uncertain markets, some may prefer to hold on to cash savings. Yet, with inflation at a record high – the CPI-All Items inflation is 5.6% in Singapore as of May 2022 (the highest since late 2021), keeping your money in a savings account is a sure way to lose the purchasing power of your money over time.

So, if we don’t want to invest in an uncertain market for fear of losing even more money, but do not wish for our savings to be eroded by inflation, what should we do?

CPF Top Ups – A Safe Way To Grow Our Money For The Future

For Singaporeans and PRs, CPF top ups are one way we can continue growing our savings for the future.

It’s worth noting that there are two kinds of CPF top ups – The CPF Voluntary Contributions & the Retirement Sum Topping-Up Scheme (RSTU). When we make CPF contributions via the Voluntary Contributions scheme, we are topping up all three CPF accounts (Ordinary, Special, MediSave). In contrast, for the RSTU, funds go only to our Special Account or Retirement Account (for those aged 55 and above). Both these methods can be used to top up our CPF accounts.

You can read more about the key differences between the CPF Voluntary Contributions and RSTU.

Given that the base interest rates for funds in our CPF Ordinary Account and Special Account/MediSave are 2.5% and 4.0% respectively, CPF is a good alternative to continue growing our savings in an otherwise volatile financial market.

In fact, this is exactly what many Singaporeans and PRs have been doing. According to the recently published CPF Annual Report 2021, voluntary CPF top-ups continued to reach new heights, with $4.8 billion in cash top-ups and CPF transfers made to their own or their loved ones’ Special or Retirement accounts, representing a 60% increase from $3 billion in 2020.

The top-ups were made by 294,000 CPF members, with about half topping up for the first time. If you are one of those topping up for the first time in 2021, thinking that you are an exception, there are also many other first-time CPF members doing voluntary top-up.

For CPF skeptics who are surprised by this figure, don’t be. As Dinesh wrote in an article earlier this year before the release of the latest information, CPF has evolved to become a safe haven for Singaporeans and PRs, given the uncertainties that we are currently experiencing such as war, high inflation and COVID-19.

In total, CPF paid out a total of $18.3 billion in interest in 2021, up from $16.8 billion in 2020. With a total of 4.1 million members, this works out to be an average of about $4,463 of interest per CPF member.

Read Also: How CPF Ended Up As A Safe Haven For Singaporeans

In spite of the stable interest rates we can earn from CPF, it does come with its disadvantage, the biggest of which being that it’s an illiquid asset. In finance definition, this means that while it holds value as an asset, this can’t quickly or easily be converted into cash.

Voluntary top-ups to our CPF accounts mean usage of the funds will be limited, at least until we turn 55 and 65.

As Market Interest Rate Goes Up, Would CPF Become Less Attractive?

The stability of the CPF interest rate is usually seen as a strength, especially during periods of low-interest rates where a CPF member would not be able to achieve similar returns in the financial market without taking on much higher investment risk.

However, in a high-interest rate environment, the rates given by CPF become naturally less appealing.

For example, as of July 2022, the Singapore Savings Bonds (SSB) give an average interest rate return of 3.00% p.a. if you hold it over 10 years. If you hold it for 3 years, the average interest rate return is 2.63% p.a., higher than the base interest rate that our CPFOA can give us.

Furthermore, with the SSB, we retain a high level of liquidity as we can withdraw our funds at any time, with no penalties other than a $2 redemption fee. So comparatively, this would make our voluntary CPF top ups less attractive.

However, unlike CPF where your interest returns are automatically compounded, SSB interest returns are paid out, and this means that investors who want to grow their savings over time have to manually reinvest the payouts on their own.

Alongside the SSB, our CPF top ups will continue to be the safest place we can park and grow our savings for the future.

Read Also: Complete Guide To Buying Singapore Savings Bonds

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