Guide to CPF interest rates: CPF SA interest rate raised further to 4.04%

TL;DR

• CPF announced that the interest rate on the Special and MediSave Accounts will be raised to 4.04% per annum from 1 October 2023 to 31 December 2023. 
• The interest rate on the Ordinary Account (OA) remains unchanged at 2.5% p.a. The last time interest rates on the CPF OA rose above 2.5% was in 1995-1999, when interest rates were at significantly higher levels than where they are currently. 
• To earn a higher interest on CPF OA savings, you can explore investment options such as the Singapore T-bill. 
• With the CPF OA interest rate staying where it is, the good news is that the HDB concessionary interest rate also remains unchanged at 2.6% p.a.

What happened?

CPF recently announced that the interest rate on the Special and MediSave Accounts will be raised to 4.04% per annum from 1 October 2023 to 31 December 2023.

The interest rate on the Ordinary Account (OA) remains unchanged at 2.5%. The interest rate on the Retirement Account also remains unchanged at 4.0%.

With our CPF savings representing a sizeable portion of our retirement nest egg, this naturally led to many questions about how are CPF interest rates calculated. 

More importantly, many are interested to find out if we would start to see the CPF OA interest rate rising above 2.5% soon! Let's dig deeper to understand more about how CPF interest rates are calculated. 

Understanding the different CPF accounts

To understand the interest rates earned on your CPF savings, we'd need to start by introducing the different CPF accounts.

(You can skip this section if you are already a CPF pro)

As you work and make CPF contributions, you would accumulate savings in three accounts: your Ordinary Account (OA), MediSave Account (MA), and Special Account (SA).

When you reach the age of 55, a Retirement Account (RA) will be created for you. 

Each of the different accounts serve a different purpose, which can be summarised as such:

• Ordinary Account: For retirement, housing, insurance and investment
• Special Account: For old age and investment in retirement-related financial products
• MediSave Account: For hospitalisation expenses and approved medical insurance
• Retirement Account: For monthly retirement payouts (Aged 55 and above)

How are CPF interest rates set?

To understand how the interest rates you earn in your CPF accounts is calculated, you will need to know the floor rate and the pegged rate. 

The floor interest rate refers to the minimum interest rate that the Government has committed to provide for your savings in CPF accounts. 

The pegged interest rate refers to a market-based rate for instruments of comparable risk and duration. 

This could be major banks rates as an example, and is intended to ensure that you will receive fair and reasonable interest rates.

If the pegged interest rate is higher than the floor interest rate, you’d get the pegged interest rate, and vice versa.  

So if the pegged interest rate is at 3.2% and the floor interest rate is at 2.5%, you’d get the pegged interest rate of 3.2%.

But if the pegged interest is at 1.8% and the floor interest rate is at 2.5%, you’d get the floor interest rate of 2.5%. 

Let’s now take a look at the floor interest rate from 1 October 2022 to 31 December 2022. 

The floor interest rate has been set to be 2.5% for Ordinary account, and 4% for Special and MediSave accounts, as well as Retirement account. 

What’s the interest rate you can earn on your CPF savings?

Ordinary Account interest rate: 2.5% per annum (from 1 October 2023 to 31 December 2023)

Reviewed quarterly, the pegged interest rate for your Ordinary Account is computed based on the 3-month average of major local banks' interest rates. 

The 3-month average of major local banks’ interest rates was 0.6633% p.a. for the period from May 2023 to July 2023.

This is subject to the legislated floor interest rate of 2.5% per annum.

Since the floor interest rate of 2.5% per annum is above the pegged interest rate of 0.6633% p.a., you will receive 2.5% per annum for savings in your Ordinary Account.

Special Account and MediSave Account interest rates: 4.04% per annum (from 1 October 2023 to 31 December 2023)

Reviewed quarterly, the pegged interest rate for your Special and MediSave Accounts is computed based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%.

The 12-month average yield of the 10YSGS was 3.04% from August 2022 to July 2023. Adding the 1% would bring it to 4.04%. 

This is higher than the current floor interest rate of 4% per annum.

Since the pegged interest rate of 4.04% is above the floor interest rate of 4.0% per annum, you will receive 4.04% per annum for savings in your Special and MediSave Accounts. 

Looking at historical CPF interest rates, this is one of the rare periods since 1999 the interest rates on the CPF Special Account and MediSave accounts exceeded 4.0%.

Retirement Account interest rate: 4% per annum (from 1 Jan 2023 to 31 December 2023)

Reviewed annually, the pegged interest rate for your Retirement Account is computed based on the weighted average interest rate of the entire invested portfolio. 

New savings credited to RA each year earn the 12-month average yield of 10YSGS plus 1% computed for the year 

The 12-month average yield of 10YSGS when it was last evaluated in October 2022 was 2.47%. Adding the 1% would bring it to 3.47%.

This is subject to the current floor interest rate of 4% per annum.

Since the floor interest rate of 4.0% per annum is above the pegged interest rate of 3.47%, you will receive 4.0% per annum for savings in your Retirement Account. 

Extra interest on the first S$60,000 of combined balances 

To help boost retirement savings, the Government pays extra interest on the first $60,000 of your combined balances, which is capped at $20,000 for Ordinary Account (OA). 

The extra interest earned on your OA savings will go into your Special Account (SA) or Retirement Account (RA) to enhance your retirement savings.

Putting this all together, this is why it is suggested that you’d be able to earn up to 5% interest on the first $60,000 of your combined CPF balances if you are below 55 years old. 

If you are aged 55 and above, you’d be able to earn up to 6% interest on the first $30,000 of your combined CPF balances, and up to 5% on the next $30,000.

Will CPF interest rates go up in 2023?

To understand whether the interest rate on your CPF accounts would go up, we’d need to analyse if the pegged interest rate across the different accounts would rise.

And not only does it have to go up, the pegged interest rate has to be above the floor interest rate which is what we are currently receiving.  

As a recap, the pegged interest rate for your Ordinary Account is computed based on the 3-month average of major local banks' interest rates. This is reviewed on a quarterly basis. 

Who does the government consider to be the major local banks? They would be DBS, UOB and OCBC.

This is because these three banks have a larger share of domestic deposits than other banks. 

Which interest rate does the government use to calculate the pegged interest rate? 

This would be based on the 3-month average fixed deposit and savings rates of the three major local banks. 

As shared by Singapore’s Minister of Manpower Dr Tan See Leng in parliament recently, this is because the government considers the OA account to be in a liquid account that can be withdrawn at any time for home purchases, servicing mortgage loans, or other specified purposes such as investment. 

The weightage is skewed towards 80% fixed deposit rate and 20% savings rate. This formula was last changed in 1999 to reflect the longer duration that CPF OA monies remained with CPF Board. 

So what does this figure come up to? 

The 3-month average of major local banks’ interest rates was 0.6633% for the period from February 2023 to April 2023.

Isn’t that considered low compared to the much higher fixed deposit rates that we see of above 3%? 

Yes, those might be rates offered by selected banks, but not by DBS for now. 

Looking at the fixed deposit rates from DBS below, the fixed deposit interest rates is still at 0.05% for 12 months for deposits above S$20,000 (as of 2 June 2023).

Has the CPF OA interest rate ever exceeded 2.5%?

Looking at historical data, the last time the interest rate on the CPF Ordinary Account was above 2.50% was in January 1995 to June 1999. 

Yes, you read it correctly. The pegged rate has never exceeded the floor interest rate of 2.50% for more than 20 years since 1999.

What happened to interest rates back in 1995 to 1999?

For readers out there who are still too young to remember, this was the lead up to the Asian Financial Crisis in 1997 and the aftermath to it.

We were not able to get the savings rates and fixed deposit rates with the local banks back then, but we are using the 3-month interbank rate for illustrative purposes.

The 3-month Singapore Three Month Interbank Rate (SIBOR) reached a high of 9.84% back then, as tighter monetary policy was used to prevent the economy from overheating. 

With the 3-month SIBOR now just slightly above 4%, we are definitely still a long way to go from the SIBOR of above 9% reached previously. 

Will the interest rates for the Special Account and MediSave Accounts rise further?

Recall that the pegged interest rate for the Special Account and MediSave accounts is the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%. 

This is reviewed on a quarterly basis. 

Hence, for the pegged interest rate to rise further from 4.04%, the 12 month average yield of the 10YSGS needs to exceed 3.04%. 

Looking at the 10YSGS over the past 12 months, the yield on the 10YSGS exceeded 3% over a few periods in the past 12 months, including in June-July 2022, Sep-December 2022, and Feb-March 2023. After dipping in the middle of year, the 10YSGS rose above 3% once again from August this year with higher US interest rates. As of 20 September 2023, the 10YSGS is at 3.40%.

What would Beansprout do?

The increase in interest rates for the CPF Special Account and MediSave Account for 1 October 2023 to 31 December 2023 to 4.04% p.a. may not be much, but it does show that the interest rate calculation above works. 

However, the CPF OA interest rate is likely to remain unchanged for now, unless interest rates rise further and stay elevated for an extended period of time. 

If you are looking for ways to make your CPF savings work harder, find out more about how you can earn a potentially higher interest by investing in T-bills.

Use our CPF-Tbill calculator to find out how much more interest you can potentially earn by investing your CPF savings into the upcoming T-bill.

With the CPF interest rate staying where it is, the good news is that the HDB concessionary interest rate which is pegged at 0.1% above the OA interest rate, also remains unchanged at 2.6% per annum. 

If you are making a HDB purchase, we share why a HDB loan is preferred over a bank loan.