This article was initially written on 24 November 2022 when OCBC was the only bank that offered fixed deposits for CPFOA savings. Since then, Maybank Singapore has also entered this space. We have updated the article accordingly to reflect the latest interest rates.
Since the start of 2022, interest rates have been rising. For lenders, this is good news. Higher interest rates mean better yield on the money that we lend.
Our CPF Ordinary Account (CPFOA) forms a big part of our savings. The base interest rate for our CPFOA is 2.5%, with the first $20,000 in our OA earning us an extra 1.0%. And with Singapore government treasury bills already yielding 4% in recent months, some Singaporeans, including members of the DollarsAndSense editorial team, have started investing their excess OA savings in these higher-yielding treasury bills.
To capitalise on Singaporeans parking their OA savings outside of the CPF system for higher yield, OCBC introduced in November 2022 fixed deposits for CPFOA savings. As of the time of writing, OCBC is offering an interest rate of between 2.7 to 3.1% p.a. for their CPFOA fixed deposits while Maybank Singapore is offering 2.9% p.a.
Source: OCBC
Source: Maybank
CPFOA fixed deposits were always an eligible product in which CPF members could invest their OA savings. Previously, however, with market interest rates so low, it didn’t make any sense for any banks to offer more than the CPF base interest rate of 2.5%.
With market interest rates higher today, banks now have the incentive to offer a rate that is higher than 2.5% p.a. to attract CPF members to invest in CPFOA fixed deposits.
On paper, investing in CPFOA fixed deposits appears logical. Since the fixed deposit can earn us up to 3.1% instead of the 2.5% that CPF pays us, CPF members will earn higher returns when parking their CPFOA savings in the fixed deposit. What, then, is the catch?
How Much More Interest Will You Get If You Invest Your CPF Special Account In T-Bills Now?
The first thing to know is that the minimum placement is $20,000 and $30,000 for Maybank and OCBC respectively. This is on top of the $20,000 that you need to set aside as a minimum amount before you can invest your CPF OA.
In other words, you need a minimum of $40,000 in your OA before you can consider depositing $20,000 as CPF fixed deposits.
Transaction Fees When Investing In CPFOA Fixed Deposits
Another area to consider is the cost of investing in CPFOA fixed deposits. When we leave our OA savings untouched in our CPF account, we earn 2.5% p.a., without having to incur any transaction costs.
For CPF investment, there are transaction fees that we pay. According to CPF, typical charges for fixed deposits would include $2.50 per transaction and $2 per counter per quarter.
OCBC charges $2.50 per transaction for payment/receipt of funds for fixed deposit.
Source: OCBC
Additional Monthly CPF Interests That May Be Lost
As explained in this article by my colleague Shashi, investing your OA savings comes with an additional month (or two) lost in terms of CPF interest.
Since CPF monthly interest is calculated based on the lowest balance for that month, this means there is potentially up to two months of interest that could be lost if you were to deposit your OA savings in a fixed deposit.
Let us illustrate this with a hypothetical example.
Assuming I have $40,000 in my OA as of 1 January 2023 and invest $20,000 of my OA savings for a year in CPF fixed deposit. The application goes through a few days later. So for the month of January, my OA balance is $20,000, and not $40,000.
I hold the CPF fixed deposit for a year till early January 2024. My CPF fixed deposit gets credited back to my CPF account in January 2024 so now I have $40,000 again in my CPFOA. However, for January 2024, CPF would also consider my balance as $20,000 since it takes the lowest balance for the month.
In other words, I lose the opportunity to earn interest on that additional month.
If you invest towards the tail end of a particular month, this could potentially stretch to two months. Here’s an illustration done by Beansprout to explain this.
Source: Beansprout
Assuming a $20,000 investment into a CPF fixed deposit, if you lose one month’s worth of CPF interest, it would be $41.66. If you lose two months’ worth of CPF interests, this works out to be $83.33 ($41.66/month) in lost CPF interests.
So while an additional 0.4% in interests (2.9% – 2.5%) will give us $80 more in interests based on a $20,000 CPF fixed deposit, we need to take into account our 1) transaction costs and 2) additional 1-2 months of CPF interests lost.
The Shoe-Leather Cost Of Heading To A Physical Bank Branch
In economics, shoe-leather cost describes the time and effort it requires for us to make an actionable financial decision.
While OCBC offers both Internet banking and an in-branch option, Maybank currently requires individuals to visit a Maybank branch. So this would take time and effort which CPF members would need to consider.
Source: Maybank
Could CPFOA Rates Change In The Future?
Lastly, we should remember that the CPFOA interest rate is computed based on the three-month average of the three local banks’ interest rates – reviewed quarterly – subject to a legislated minimum interest of 2.5 per cent per annum.
Thus, it’s theoretically possible, though not immediately likely, that the CPF OA interest rate may be reviewed and increased beyond 2.5% p.a. during a period when one may have invested their OA savings with a fixed deposit.
As of the period from August 2023 to October 2023, the three-month average of the three local banks’ interest rates is only at 0.66%.
Step-By-Step Guide To Opening Your CPF Investment Account (CPFIA)
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