As we approach the year-end, we can characterise 2023 as a period of both rising interest rates and the cost of living. While this may mean higher borrowing costs, whether to finance our property purchase, motor vehicle, or personal loan, it also benefits us as savers with higher savings rates.
This prompted our DollarsAndSense team to write about the different ways that we could maximise our cash savings in 2023, such as through high-interest savings accounts and short-duration bond funds. The idea is to maximise the returns to grow our savings faster and keep pace with the rising cost of inflation.
One type of savings that we may neglect to optimise is our Central Provident Fund-Ordinary Account (CPF-OA) funds. Though we are able to use our OA funds for different purposes, such as servicing our home loans or investing in a wide range of products under the CPF Investment Scheme (CPFIS), they are ultimately meant to serve as savings for our retirement needs.
Hence, as we optimise and grow our cash savings, we should also do the same with our CPF OA fund savings. Here are three strategies in this current economic climate that we can adopt to optimise our CPF OA savings for 2024.
Transfer Ordinary Account Savings To Special Account For Higher Savings
As working adults, we contribute a higher proportion of our salary towards our OA than our Special Account (SA). As a result, we accumulate more savings in our OA earning 2.5% per annum (p.a.) than in the higher interest-bearing SA.
One way to optimise and boost our returns on OA savings is to transfer the funds to our SA to compound at a higher interest rate. This would enable us to earn a higher interest rate of 4.08% p.a. (from January to March 2024) on the SA, which has a floor rate of 4% p.a. maintained till 31 December 2024.
The table below illustrates how much more in interest we would earn by transferring $10,000 from OA to SA over a period of 1-year, 5-years, and 10-years.
|
CPF Compounded Annual Interest On $10,000 |
|||
| 1-Year | 5-Year | 10-Year | |
| Ordinary Account @2.50% p.a. | $250 | $1,314.08 | $2,800.85 |
| Special Account @4.08% p.a. | $408 | $2,213.40 | $4,916.70 |
| Difference | $158 | $899.32 | $2,115.85 |
The potential returns could be higher as the first $60,000 (capped at $20,000 for OA) of our CPF combined balances will earn an extra 1% interest. This simply means that if we have more than $20,000 in our OA and less than $40,000 combined in our SA and Medisave Account (MA), it would be more financially rewarding to make the CPF transfer from our OA to SA.
We are allowed to make a CPF transfer of our funds from OA to SA as long as we are under 55 years old and have not met the Full Retirement Sum (FRS) of $205,800 in 2024.
However, before we make a CPF transfer, which is an irreversible action, we must be certain that we will not require the additional funds for other immediate uses, such as financing our housing loans or student loans under the CPF Education Loan Scheme.
Read Also: Step-by-Step Guide To Transferring CPF Ordinary Account (OA) To Special Account (SA)
Paydown Outstanding Home Mortgage
Due to the low interest rate over the last decade, many homeowners may have chosen to finance their property purchases using a bank loan on a floating-rate package. Some may have also opted to pay their monthly mortgages using cash savings, which yielded a low interest rate, while leaving their OA savings untouched to compound at a higher interest rate.
However, in the current high interest rate environment with mortgage rates spiking from under 2% p.a. to around 3.5% to 4.5% p.a., the old practice of using our cash savings over CPF OA funds may be counterintuitive if we want to optimise our savings.
Instead, we could do the reverse by keeping our cash savings in high-interest savings accounts or investing in short-duration bond funds that yield above 3% p.a. and using the lower interest rate-bearing CPF OA savings to finance our outstanding mortgage payments.
Depending on our mortgage rates, we may also choose to use our OA savings to either make partial capital repayments or redeem the outstanding loan. This flexibility allows us to maximise the returns on our cash savings in this current (potentially long-term) high interest rate environment.
Do note that the minimum amount for partial capital repayments for HDB housing loans commenced before 1 April 2012 is $500. For loans commenced after this date, the minimum amount is $5,000, with increments in multiples of $1,000.
Read Also: What A 1% Increase In Interest Rates Could Mean For Your Home Loan Repayment
Invest Ordinary Account Funds In Treasury Bills (T-Bills)
For those of us who wish to keep our savings in OA, we could consider investing for higher returns. For instance, the high interest rate environment has pushed the yields on Singapore Government Securities (SGS) to above 3% p.a. In particular, the Treasury bill (T-bills) that are backed by the Singapore government and issued on a 6-month and 1-year tenor can be invested under the CPFIS after setting aside a minimum sum of $20,000.
The latest 6-Month T-Bill (BS23124S) issued on 12 December 2024 had a cut-off yield of 3.74% p.a., which is 1.24% higher than the OA base interest rate of 2.5% p.a. In dollar terms, if we invested $10,000 of our OA funds in the T-bills, we would receive $187 after 6 months or $62 more than the $125 if we left it untouched in our OA.
However, this is a simplistic calculation and we have to also consider the opportunity cost of losing one- or two-months interest when the investment funds are returned to OA. A simple tool that we can use to determine the investment returns is the CPF-Tbill Calculator by our friends at Beansprout. For instance, based on the above T-bill issuance, the calculator estimates a potential additional interest earned of $33.65 after accounting for the opportunity cost and administrative charges.
This presents us with a good arbitrage opportunity to earn a higher return without taking on added investment risk. However, due to the short-term tenor of the T-bills, we would face a re-investment risk each time a T-bill matures.
Read Also: Why Every Singaporean Should Apply To Invest Their OA Funds In T-Bill
We Should Not Neglect Ordinary Account Savings When Optimising Our Investment Portfolio
Often, when we review our investment portfolio, we ask ourselves whether our funds are generating the maximum return for the risk that we are willing to bear. While we may have been complacent in the past in accepting that our OA funds were generating a decent return, the same cannot be said in the current environment.
By being proactive in deciding whether to make a CPF transfer, paydown our higher-interest bearing mortgage loan, or simply invest in a low-risk investment product like T-bills, we could optimise our OA savings and possibly earn a higher return. Moreover, investing in products such as the T-bills using our OA funds through internet banking from one of the three local banks has made it easier to make OA savings work harder for us.
These simple steps that we take to optimise our OA savings may allow us to accumulate more for our retirement savings in the years to come.
Read Also: Step By Step Guide To Buying T-Bills Online Using Your CPF OA Savings
The post Why It’s Vital To Fully Optimise Our CPF Ordinary Account (OA) Savings For 2024 appeared first on DollarsAndSense.sg.
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