CPF SA interest rate at 4.05%. Should you do a top-up?

What happened?

With the CPF Special Account (SA) interest rate at 4.05% per annum in the second quarter of 2024, many have asked us if it is worthwhile to put more money into our SA accounts.

There are mainly two ways in which you can grow your CPF SA in a safe way, either by transferring your Ordinary Account (OA) funds to your SA or by doing cash top-ups to your SA.

Earlier, we shared about what you should consider before transferring your OA funds to your SA.

We will now take a deep dive into the pros and cons of topping up your CPF SA account, and whether it might be worthwhile doing so.

Why you may want to consider CPF SA top-up

#1 - It offers a safe way to earn a relatively high return 

If you didn’t already know, the prevailing interest rate of the CPF SA stands at 4.05% per annum (from 1st April 2024 to 30th June 2024).

This current prevailing interest rate exceeds other similarly products such as T-Bills and bank fixed deposits.

Thus, if you do a cash top-up to your SA, you are effectively getting more interest on your cash, with the added benefit of contributing to your CPF retirement payouts too.

#2 - You will receive tax relief

As long as you top up your SA before 31st December of every year, you will receive a $1 deduction in your total taxable income for every $1 you topped up to your SA. This is applicable for up to a limit of $8,000.

So for example, if you topped up $5,000 in cash to your SA, $5,000 would be deducted from your total taxable income.

You can also receive another $8,000 in tax reliefs if you do a cash top-up to the SA/RA of your parents/parents-in-law, grandparents/grandparents-in-law, spouse or siblings, subject to certain conditions which can be read in full here.

Thus, you could gain up to a maximum of $16,000 in tax relief by doing cash top-ups to both your SA and your loved one’s SA/RA. 

Apart from a CPF SA top-up, it might also be worthwhile considering the Supplementary Retirement Scheme (SRS) top-up for tax relief. 

#3 - A fuss-free way to boost your retirement savings

By doing a cash top-up to your SA, you are effectively using CPF to ‘auto-pilot’ your retirement planning. There are two sides of the coin to doing so.

On the flip side, you would not experience any fluctuations in your SA funds and will continually earn the prevailing interest rate year after year. Our SA funds are also guaranteed and backed by the Singapore Government.

In addition, every dollar topped up to your SA would also boost your retirement payouts at the age of 65 or 70 years old, depending on when you choose to enrol into the CPF LIFE scheme.

Furthermore, by topping up your SA, you would also get that much closer to hitting the Full Retirement Sum (FRS).

The FRS for 2024 stands at $205,800 and it is also the limit to which you can transfer your OA funds or do cash top-ups for your SA. 

This sum is set to increase at 3.5% per annum till 2027. Thereafter, the FRS will still continue to increase at a rate determined by the Government.

So why is hitting the FRS a good thing?

Basically, it comes down to compounding interest. By hitting your FRS early, there are more years for your SA funds to compound at a higher amount till you hit 55 years old (where you can withdraw the excess funds on top of the FRS then), or let it continue compounding till 65 or 70 years old for higher retirement payouts. 

Additionally, once you hit the FRS, the annual interest earned would offset the yearly increase to the FRS. Thus, you no longer need to top up any more cash to your SA henceforth since the SA funds you have would always exceed the FRS for that year.

Also, since the FRS is not a limit cap on your SA balance, you would still continue to receive SA contributions via your employment (from both yourself and your employer) as per normal even after hitting the FRS!

The downside to opting for this ‘fuss-free’ way to retirement is that whatever cash you topped up to your SA would be locked in till at least age 55 years old and would also be subjected to whatever prevailing interest rate the Government plan for the CPF SA to be.

There are also other disadvantages which I will cover more below.

Why you may consider against a CPF SA top-up

#1 - It will impact your liquidity

The moment you top up any cash to your SA, it would practically be non-withdrawable till at least the age of 55 years old.

This could become an issue if you need urgent access to cash, be it for investment or business opportunities or medical/family emergencies.

Thus, you should make sure that you do not have a need for this cash all the way till you are 55 years old before you do the cash top-up to your SA. 

#2 - You may be losing out on other investment opportunities

As mentioned earlier in the article, doing a cash top-up to your SA results in you locking up that cash to the prevailing SA interest rate.

This means that you may be losing out on other investment opportunities that may be able to generate a potentially higher long-term return, especially for younger investors who have a longer time horizon. 

Of course when it comes to investing, always do your research and diversify your investments accordingly. Please never invest just based purely on a stock tip or recommendation!

What would Beansprout do?

Topping up your CPF SA account offers a fuss-free way to boost your retirement savings by allowing you to earn a relatively high return in a low-risk way. 

It also offers you a tax relief of up to $16,000 if you perform a cash top-up to both your SA and your loved one’s SA/RA.

However, we would make sure that we have sufficient funds set aside for emergencies and unexpected life circumstances, as funds from your CPF SA account are practically non-withdrawable till at least the age of 55 years old.

Such emergency funds can be put into a high-yielding savings account instead. 

We should also be mindful of the opportunity costs of performing a CPF SA top-up, such as other investments we might be able to take on that can potentially generate a higher long-term return. 

Before you perform a SA top-up, one other option to consider is to transfer your CPF OA funds to SA. 

If you are looking for more flexible and relatively low-risk options that allow your spare cash to work harder, you can also consider T-bills, Singapore Savings Bonds and bank fixed deposits.