Recent CPF Changes – Opportunities for all

The recent CPF Changes have certainly raised many eyebrows and talk in the heartland of Singapore. The 1% increase in interest rates offered by CPF looks enticing, many welcome the changes as part of the government’s move to ensure a more stable retirement platform for the aging population of Singapore.

In a recent CPF Newsletter “In Touch with CPF”, the additional 1% interest is explained to give Singaporeans higher returns on their CPF OA, SA as well as their Medisave. However the additional 1% is not as straight forward as it seems.

1. 1st $60,000 of the combined CPF balance will enjoy additional 1% interest.
2. Only 1st $20,000 of the CPF OA will enjoy a guaranteed additiomal 1% interest
3. The 1st $20,000 of the CPF OA cannot be used for CPFIS approved schemes, starting from Jan 2008
4. The Special Acc and Medisave will enjoy additional 1% interest guaranteed for 1st 2 years only. thereafter it will be invested into a 10 year SGS bond in which can expect some fluctuations overtime averaging at higher than 4% (as mentioned in the CPF write up)

IN A NUTSHELL…

It simply means that that additional 1% of $60,000 which is up to $600 per year will be paid out to CPF members by the government. or rather up to $200 for the OA only per year, since the SA will be put into the SMRA scheme after 2 years.

POSSIBLE SCENARIOS
Current CPF scenario
$20,000 at the 2.5% in 20 years will give $16,386 based on future value calculation.

New CPF scenario
$20,000 at the 2.5% + 1% in 20 years will give $39,795 based on future value calculation.

ENDOWNMENT PLAN scenario
By taking $20,000 and putting it into a savings vehicle with 4.4% that has low risk for 20 years will give $47,319 based on future value calculation.

CAPITAL PROTECTED GROWTH PLAN scenario
$10,000 in a low risk fund at 4.4%  = $23,659
$10,000 in a higher performing fund at an average of 7% = $38,696
The above will come to a projected return of $62,356, which is far higher than the previous 2 scenarios.

The above example is simply talking about OA, not even the SA, given the same situation for SA based on the new scheme of using the 10 year SGS, a capital protected growth plan can still give potentially higher returns and yet protected the based principle from market fluctuations when compared to the new scheme.