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Why your CPF interest rate has not gone up with soaring interest rates

24 Sep 2022

Wondering if you'll be getting a higher interest rate on your CPF savings? We explain why CPF interest rates are unchanged for now.

CPF interest rate 2022

TL;DR

  • CPF interest rates have not gone up with rising interest rates, as you are still receiving the minimum interest rate legislated by the government which exceeds the calculated market-based rate. 
  • CPF interest rates are likely to remain unchanged for now, unless interest rates rise significantly and stay elevated for an extended period of time. 
  • The last time interest rates on the CPF OA account rose above 2.5% was in 1995-1999, when interest rates were at significantly higher levels than where they are currently. 
  • 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 from 1 October to 31 December 2022. 

What happened?

Many in the Beansprout community have asked us whether the CPF interest rates will rise with the soaring interest rates in recent months.

After all, our CPF savings form a sizeable portion of our retirement nest egg. The CPF interest rates also affects the concessionary interest rate for HDB loans. 

So let's dig a deeper to find out if we would start to see the CPF OA interest rate rising above 2.5% soon!

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)
Diagram

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Source: CPF

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. 

Graphical user interface, application

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Source: CPF

What’s the interest rate you can earn in your CPF account?

Ordinary Account interest rate: 2.5% per annum (from 1 October 2022 to 31 December 2022)

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 0.09% for the period from May 2022 to July 2022.

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 0.09%, you will receive 2.5% per annum for savings in your Ordinary Account. 

Special Account and MediSave Account interest rates: 4% per annum

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 2.06% from August 2021 to July 2022. Adding the 1% would bring it to 3.06%. 

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 3.06%, you will receive 4.0% per annum for savings in your Special and MediSave Accounts. 

Retirement Account interest rate: 4% per annum

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 was 1.34%. Adding the 1% would bring it to 2.34%.

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 2.34%, 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.

CPF Interest Rates
Source: CPF

Will the interest rates earned in your CPF accounts rise as interest rates go up?

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.  

Will the interest rates earned in your CPF OA accounts go up?

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 0.09% for the period from May 2022 to July 2022.

Source: CPF

Isn’t that considered low compared to the much higher fixed deposit rates that we see of above 2%? 

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

Looking at the fixed deposit rates from DBS below (as of 23 September 2022), the fixed deposit interest rates is still at 0.05% for 12 months for deposits above S$20,000. 

Table

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Source: DBS

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 at about 3%, we are definitely still a long way to go from the SIBOR of above 9% reached previously. 

That’s even if the US Fed raises interest rates by another 1.25 percentage points as projected by the end of this year. 

Chart, line chart

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How about pegged interest rates for the Special Account and MediSave Accounts?

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 be above the floor interest rate of 4%, the 12 month average yield of the 10YSGS needs to exceed 3%. 

The yield on the 10YSGS exceeded 3% briefly in June this year, but came down subsequently in July. 

More recently, it also climbed above 3% with the higher 10-year US Treasury bond yield. 

However, the yield on the 10YSGS will have to climb higher or stay above 3% for a longer period of time for the 12-month average to get to above 3%.

Once again, looking at historical CPF interest rates, the last time that the interest rates on the CPF Special Account and MediSave accounts exceeded 4.0% was in 1999. 

Graphical user interface, chart, line chart

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Source: Tradingview

What would Beansprout do?

CPF Interest Rate September 2022

Recently, there have been more questions asked about whether the CPF interest rate will be increased soon with the higher interest rates being offered by the banks. 

As we explained above, the pegged interest rates for various CPF accounts have not gone above the floor interest rates as yet. 

As such, the CPF interest rates are likely to remain unchanged for now, unless interest rates rise significantly and stay elevated for an extended period of time. 

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  from 1 October to 31 December 2022. 

If you are making a HDB purchase, our guest contributor has shared why a HDB loan is preferred over a bank loan.

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