Given the low interest rate environment over the past 20 years, most of us were happy enough to earn the floor interest rates on our CPF accounts.
While our CPF Ordinary Account (OA) earns a floor interest rate of 2.5%, our Special Account (SA), MediSave Account (MA) and Retirement Account (RA) earn a higher floor interest rate of 4.0%.
As global interest rates have risen sharply over the past 2 years, simply earning this minimum interest rate may is not as attractive anymore.
Read Also: Why Every Singaporean Should Apply To Invest Their OA Funds In T-Bill
CPF Interest Rates Have Already Risen Above The Floor Rates
Since July 2023, our Special Account (SA) and MediSave Account (MA) balances have been earning more than the floor interest rates.
This is because we don’t just earn an arbitrary floor interest rate on our CPF balances. Instead, we earn an interest rate that can rise and fall based on a formula. If the interest rates are lower than the floor rate, we simply earn the floor rate.
If the interest rates are higher than the floor rate, we earn the higher calculated interest rate.
From July 2023, our SA and MA interest rates have been climbing – to 4.08% in Jan-Mar 2024.
| CPF Interest Rates | OA | SA | MA | RA |
| Jan-Mar 2024 | 2.5% | 4.08% | 4.08% | 4.08% |
| Oct-Dec 2023 | 2.5% | 4.04% | 4.04% | 4.00% |
| Jul-Sep 2023 | 2.5% | 4.01% | 4.01% | 4.00% |
| Apr-Jun 2023 | 2.5% | 4.00% | 4.00% | 4.00% |
Source: CPF
In the table above, we can also see that our Retirement Account has only just been raised for the Jan-Mar period. This might have been confusing for some of us, as we may have assumed that the interest rates we earn for all three accounts would be the same.
That’s not entirely wrong. The formula used to calculate the interest rate for all three accounts is the same. The big difference WAS that our Special Account and MediSave Account interest rate is reviewed quarterly, while our Retirement Account interest rate was reviewed yearly.
Our Retirement Account Interest Rate Now Reviewed Quarterly
During the latest round of CPF interest rates review for the Jan-Mar 2024 quarter, it was revealed that the Retirement Account interest rate peg will be aligned to the Special Account and MediSave Account.
Source: Screenshots (without red fonts and box) are from CPF website
The first thing we will notice in the screenshots above is that our Retirement Account is reviewed annually in the “old calculation”. In the “new calculation”, it is reviewed quarterly.
We may also realise that the “old calculation” made a distinction when referring to “New savings credited to RA each year”. This part is not mentioned in the “new calculation”.
Finally, if we actually look at how the interest rates are derived, it remains the same. In both calculations, the rate is computed based on the “12-month average yield of 10-year Singapore Government Securities plus 1%”.
This all means that our RA interest rate will be computed quarterly instead of an annual basis from 1 Jan 2024.
Here are 3 implications for CPF members.
Read Also: Why CPF Needs To Review Interest Rates For Our Ordinary, Special, MediSave And Retirement Account
#1 Retirement Account Interest Rates To Be Same As Special Account And MediSave Account
Since this review is for the start of the year (i.e. Jan-Mar 2024), the calculated Retirement Account interest rate was always going to be the same as our Special Account and MediSave Account interest rate.
Going forward now, our Retirement Account interest rates will be aligned to our Special Account and MediSave Account interest rates during each quarterly review.
This makes sense since the intent for our Special Account and Retirement Account is quite similar – to be used for our retirement adequacy.
#2 Retirement Account Interest Rates To Be More Responsive To Market Rates Going Forward
In a rising interest rate environment, it will be more attractive if our Retirement Account interest rate is reviewed quarterly. Being reviewed yearly means it will take longer for our Retirement Account interest rate to catch up to market rates.
However, if interest rates were to decline in 2024, our Retirement Account would no longer be held at the calculated 4.08% level for the entire year now.
Instead, it will fall back down to 4.0% (i.e. the floor rate). This means the change to be aligned to the Special Account and MediSave Account interest rate would disadvantage us.
In any case, the current dip will only be for a maximum of 0.08%, as our Retirement Account interest rate is still protected by a floor rate of 4.0%.
#3 Retirement Account Will Not Offer Lower Interest Rate Than Special Account
If we think about it, our Retirement Account is even more restrictive compared to our Special Account. By right, we should earn a slightly better return on more restrictive and/or higher-risk investments – rather than potentially earn a worse return.
It is a decent compromise for our Retirement Account to earn the same return as the Special Account – especially during a rising interest rate environment.
Next Quarterly Interest Rate Review In March 2024
The next CPF interest rate review will happen in early March – and we can watch out for changes to our Retirement Account interest rates then.
It is also interesting to note that the Ordinary Account interest rate is not rising in tandem our SA, MA or RA. This can be partially explained by the fact that a different formula is used to calculate the interest rates on the OA – which gave a 0.66% yield. Hence, we continue to earn the 2.5% floor rate on our OA.
Nevertheless, the market rate that anyone would accept in a fixed deposit or high-interest savings account has significantly gone up in the past 2 years as well.
Read Also: 15 Little-Known Things About CPF That Most Singaporeans Are Still Unaware About
The post Why CPF Changed The Way Our Retirement Account (RA) Interest Rates Are Calculated appeared first on DollarsAndSense.sg.
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