Discover the potential advantages and disadvantages of transferring funds from your CPF Ordinary Account (OA) to your CPF Special Account (SA) with the recent interest rate increase.
You might have heard of the increase in interest rate for our CPF Special and Medisave accounts to 4.01% per annum (from 1st July 2023 to 30 September 2023).
While the additional earned interest might not be that significant (extra money never hurts), you might be wondering if it is an opportune time to transfer some of your OA funds to your SA account to earn a higher interest.
Before answering that question, let’s recap the differences between the CPF Ordinary Account (OA) and Special Account (SA).
Prevailing Interest Rate
How the funds can be utilised
(A minimum of $20,000 needs to be set aside before any excess amount can be invested)
(A minimum of $40,000 needs to be set aside before any excess amount can be invested)
In addition, let’s also not forget the extra interest that is being paid on our first $60,000 combined balances.
For those under 55 years old:
You earn an extra 1% per annum on your first $60,000 of combined CPF balances (capped at $20,000 for OA).
For those 55 years old and above:
You earn an extra 2% per annum on your first $30,000 of your combined CPF balances (capped at $20,000 for OA) and an extra 1% per annum on your next $30,000 of combined CPF balances (again capped at $20,000 for OA).
Why it might be worthwhile transferring your OA savings to SA
So why should we even consider transferring from OA to SA in the first place? To answer that we have to go back to the original purpose and intention of the whole CPF system.
The CPF system came into effect on 1st July 1955 (yes it has been around that long) to ensure that Singaporeans could support themselves during their retirement years.
While the usage of our CPF funds has since been expanded to include aspects such as housing and investing, the fundamental purpose of the CPF system and its emphasis on retirement still remains.
This also explains why there is accrued interest to be paid on your OA funds when they are used for housing purposes. But that is another thing altogether for another article.
Thus, transferring your OA funds to SA to earn a higher interest is just basically you planning for your retirement needs in the future.
However, with that said there are pros and cons that you need to consider before doing this transfer.
What are the advantages of transferring your OA funds to SA?
Let’s start with the pros first.
#1 - A risk-free way to build your retirement savings
The current interest rate of the SA exceeds the returns of other risk-free investments such as T-bills or fixed deposits from banks.
At 4.01% per annum, it beats the latest yield of the 25th May 6-month T-bill yield of 3.85% per annum and also the highest fixed deposit interest rate of 3.55% per annum.
While there are worries that we may not get access to our CPF funds at the age of 55 years old and above, I think these worries are unfounded.
According to the CPF website, our CPF savings are invested in Special Singapore Government Securities (SSGS) which are guaranteed and backed by the Singapore Government.
If you are interested to find out how the SSGS is then used by the Government, you can check out this article by MOF here.
#2 - You are making your CPF funds work harder for your retirement
We highlighted the extra interest rate that the SA provides as compared to the OA. But you may be wondering, how much more is it in actual terms?
Using $10,000 as an example, you would have $16,386.16 in your OA after 20 years.
If the same $10,000 was left in your SA, you would have $21,911.23 after 20 years.
You might be thinking…hmm a difference of $5,000 isn’t much.
To be fair, yea it isn’t much. But what happens if it becomes $30,000 instead?
With $30,000, the amount in your OA after 20 years would be $49,158.49.
The same $30,000 in SA would instead give you an amount of $65,733.69. That is a difference of around $16k!
Not surprisingly, the higher amount you leave in your SA, the higher the difference would be as compared to leaving funds inside your OA, over the same period of years.
Furthermore, with the rule of 72 (which is roughly how long it would take for your money to double with a specific return), it would take roughly 18 years (72/4) to double your money in your SA as compared to 28.8 years for the same amount to double in your OA!
#3 - You would hit the Full Retirement Sum (FRS) faster
If you did not know, the CPF Full Retirement Sum (FRS) limits both the amount of funds that can be transferred from your OA to SA and the amount of cash that can be topped up to your SA.
For 2023, the FRS currently stands at $198,800 and this amount would increase yearly by 3.5% till 2027 to account for inflation. At its current number, the FRS would provide $1,510 to $1,620 in payouts for life under the CPF LIFE scheme, should you hit 55 years old this year.
Do note that the FRS amount would always increase year after year, just that the amount that it increases by would be determined by government policies. Thus, do not be mistaken that the FRS would stop increasing after 2027.
So why is hitting the FRS faster a good thing?
It again boils down to the effects of compounding interest. When you hit the FRS, the annual interest you received would more than cover the yearly increment to the FRS. Thus, you are effectively earning more and more compound interest per year after hitting the FRS.
Furthermore, contrary to popular belief, the FRS is not a hard limit cap. This means that whatever CPF SA contributions you make (or receive) due to your employment would still flow into your SA account even after you have hit the FRS. The same goes for the annual interest. Hitting the FRS basically just means that you can no longer transfer funds from your OA to SA nor do cash top-ups to your SA.
As such, you can see that by hitting the FRS early, you are effectively securing a portion of your retirement needs in the future through the effect of compounding interest!
What are the disadvantages of transferring your OA funds to SA?
Having touched on the pros, I would now cover the cons.
#1 – Transfer is irreversible
While the opportunity to earn higher interest with your SA might be appealing, you have to keep in mind that the transfer is irreversible.
This means that once you have transferred your OA funds to SA, you can no longer use them for housing downpayment, monthly mortgage payments and investing.
Thus, if a huge portion of your OA funds have been used to fund a housing downpayment recently and you are also using your OA for future mortgage payments, transferring your OA to SA might not something you’d want to do at this point in time.
#2 - You lose out on potential investment options
While you can still use your SA funds to invest in certain investment products, there are more restrictions on the type of investments you can take on compared to the OA.
For example, you can use your OA funds to invest in individual stocks and REITs on the SGX market. However, you will not be able to do so with your SA funds.
#3 - You may face higher mortgage payments for a future housing upgrade
As mentioned earlier, the transfer from OA to SA is irreversible.
If you are planning to sell your first flat after the MOP period and have transferred your OA funds to SA, there is a possibility that you could end up with a higher mortgage payment than before.
How can this happen? If your second flat is more expensive than your first, and you have less available funds in your OA to pay for the balance of the second flat, you would have to take a larger housing loan. This will then translate into higher monthly mortgage payments.
Thus, if you are looking to sell your first flat after MOP, ensure that your net sale proceeds and remaining OA funds can cover a portion of the balance for the second flat, so as not to end up with significantly higher mortgage payments.
What would Beansprout do?
At the end of the day, whether you should transfer your OA funds to SA boils down to one question; Are you using (or planning to use) your OA funds for housing?
If you are, transferring your OA funds to SA will restrict the amount of breathing space when it comes to your mortgage payments.
Typically, it is ideal to have at least 2 to 3 years of mortgage payments saved up in your OA to account for any unexpected situations where there are no contributions to your OA account.
If you are currently using your OA funds for mortgage payments and have enough to sustain 2 to 3 years of mortgage payments, you can consider transferring excess funds to your SA to build towards your retirement savings.
Lastly, for those who do not foresee themselves using OA funds for whatever reason till they are 35 years old, transferring OA funds to your SA could be a way to supercharge your retirement planning.
Doing the above would also mean that you would hit the FRS early and thus also allow your OA funds to continue building up slowly till you are 35 years old. Of course, this is with the notion that you would remain gainfully employed till 35 years old.
Also, if you have a generally low-risk appetite, transferring to your SA remains a risk-free way to earn a higher return on your CPF funds
Should you choose not to transfer your OA funds to SA but are looking for a safe way to get higher returns for your OA, you can also consider investing in T-bills to potentially earn a higher return.
Check out our guide on how you can retire well using your CPF savings.
Join the Beansprout Telegram group if you have a question on maximising your CPF savings.
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Thong Jun Xi