Since the start of the year, interest rates have been rising. For lenders, this is good news. Higher interest rates mean better yield on the money that we lend. Combining this with the fact that the stock market has been performing poorly since the start of 2022, it’s no surprise that Singaporeans are on the search for higher, safer returns.
Our CPF Ordinary Account (CPFOA) forms a big part of our savings. The base interest rate for our CPFOA is 2.5%, with the first $20,000 in our OA earning us an extra 1.0%. And with Singapore government treasury bills already yielding 4% in recent months, some Singaporeans including members of the DollarsAndSense editorial team have started investing their excess OA savings in these higher-yielding treasury bills.
To capitalise on Singaporeans parking their OA savings outside of the CPF system for higher yield, OCBC announced last week that it will be offering fixed deposits for CPFOA savings at 3.4% p.a.
Fixed deposits were always an eligible product that CPF members can invest their OA savings. Previously, however, with market interest rates so low, it didn’t make any sense for banks to offer more than the CPF base interest rate of 2.5%.
With market interest rates much higher today, banks have the incentive to offer a rate that is higher than 2.5% p.a. to attract CPF members to deposit their CPF savings into fixed deposits.
On paper, it appears logical. Since the fixed deposit can earn us 3.4% instead of the 2.5% that CPF pays us, CPF members will earn higher returns when parking their CPFOA savings in the fixed deposit. What then is the catch?
The first thing to know is that the minimum placement is $20,000. This is on top of the $20,000 that you need to set aside as a minimum amount before you can invest your CPF OA. In other words, you need a minimum of $40,000 in your OA before you can consider depositing $20,000 as CPF fixed deposits.
Transaction Fees When Investing Our CPFOA
Another area to consider is the cost of investing our CPFOA. When we leave our OA savings untouched in our CPF account, we earn 2.5% p.a., without having to incur any transaction costs.
For CPF investment, there are transaction fees that we pay. According to CPF, typical charges for fixed deposits would include $2.50 per transaction and $2 per counter per quarter.
OCBC charges $2.50 per transaction for payment/receipt of funds for fixed deposit.
Additional Monthly CPF Interests That May Be Lost
As explained in this article by my colleague Shashi, investing your OA savings comes with an additional month (or two) lost in terms of CPF interest.
Since CPF monthly interest is calculated based on the lowest balance for that month, this means there is potentially up to two months of interest that could be lost if you were to deposit your OA savings in a fixed deposit.
Let us illustrate this with a hypothetical example.
Assuming I have $40,000 in my OA as of 1 January 2023 and invest $20,000 of my OA savings for a year in CPF fixed deposit. The application goes through a few days later. So for the month of January, my OA balance is $20,000, and not $40,000.
I hold the CPF fixed deposit for a year till early January 2024. My CPF fixed deposit gets credited back to my CPF account in January 2024 so now I have $40,000 again in my CPFOA. However, for January 2024, CPF would also consider my balance as $20,000 since it takes the lowest balance for the month.
In other words, I lose the opportunity to earn interest on that additional month.
If you invest towards the tail end of a particular month, this could potentially stretch to two months. Here’s an illustration done by Beansprout to explain this.
Assuming a $20,000 investment into CPF fixed deposit, if you lose two months’ worth of CPF interests, this works out to be $83.33 ($41.66/month) in lost CPF interests.
So while an additional 0.9% in interests (3.4% – 2.5%) will give us $180 more in interests based on a $20,000 CPF fixed deposit, we need to take into account our 1) transaction costs and 2) additional 1-2 months of CPF interests lost.
The Shoe-Leather Cost Of Heading To A Physical Bank Branch
In economics, shoe-leather cost describes the time and effort it requires for us to make an actionable financial decision.
Unfortunately, to invest your CPFOA in a fixed deposit, we need to head down to a bank branch. This will take time and effort, especially if we are stuck in a long queue.
Could CPFOA Rates Change In The Future?
Lastly, we should remember that CPFOA interest rate is computed based on the three-month average of the three local banks’ interest rates – reviewed quarterly – subject to a legislated minimum interest of 2.5 percent per annum.
Thus, it’s theoretically possible, though not immediately likely, that CPF OA interest rate may be reviewed and increased beyond 2.5% p.a. during a period when one may have invested their OA savings with a fixed deposit.
As of the period from May 2022 to July 2022, the three-month average of the three local banks’ interest rates is only at 0.09%.
The post OCBC Is Now Offering 3.4% P.A. For CPFOA Fixed Deposit, But What’s The Catch? appeared first on DollarsAndSense.sg.