The Sunday Times: Should you invest your CPF savings elsewhere?

Should you invest your CPF savings elsewhere?

Changes to CPF rules have left Singaporeans with a key question about their cash - do they take it or leave it?

Lorna TanSun, Oct 07, 2007The Sunday Times

CHANGES to Central Provident Fund (CPF) rules have left Singaporeans with a key question about their cash - do they take it or leave it?

Taking it means trying to invest it somewhere else in the hope of better returns. Otherwise, they could leave the money with the Board.

Financial advisers and insurance agents are naturally pushing the first option, and they are stepping up efforts to persuade Singaporeans to invest their CPF savings.

Under the new rules, which will take effect on April 1, a CPF member will not be allowed to invest the first $20,000 of his CPF Ordinary and Special accounts savings under the CPF Investment Scheme (CPFIS).

Money already invested through the CPFIS will not be affected. A member can still use Ordinary Account (OA) funds for housing, CPF insurance and education schemes.

This explains why financial advisers and insurance agents are keen to get Singaporeans to invest their CPF savings with them.

And the campaign has been intense.

Intensified efforts

SECONDARY school teacher Shirley Phua, 40, said: 'My adviser has been trying to convince me to invest my CPF savings. He says his recommended unit trusts will give a better return than the CPF guaranteed rates.'

Ms Phua might be in safe hands if she takes a medium- to long-term view and her adviser constructs a diversified investment portfolio.

Other CPF members might not be so lucky if they encounter unscrupulous advisers and agents employing tactics such as the promise of 'instant cash' if CPF money is invested in unit trusts.

Classified newspaper advertisments are offering 'instant cash' of 1 per cent, or $1,000, for every $100,000 invested. One such ad reads: 'Fast cash. Use CPF to assist you.'

Market observers say the ads are a clear sign that some unscrupulous agents are still trying to make a quick buck by inducing CPF members to make unsuitable investments using cash that is earmarked for their retirement.

It is estimated that 10 to 30 per cent of advisers and agents are offering cash rebates - a practice that contravenes CPF policy.

Cash rebates or freebies are in effect a premature withdrawal of CPF savings and a violation of CPF Board rules.

Not surprisingly, the topic of higher interest returns was one of the most controversial during the recent Parliament debate.

It also made its rounds in Internet chatrooms and forums. One popular website, for example, had this comment: 'Once the money is in CPF, it is considered gone. There is no flexibility, you can't invest elsewhere to take advantage of opportunities.'

It was referring to the first $20,000 of a CPF member's savings in the OA and Special Account (SA).

Key changes

LAST month, the Government announced changes to the CPF that are aimed at ensuring Singaporeans will have sufficient lifetime savings.

CPF members will receive additional interest of 1 percentage point on the first $60,000 in their accounts.

This means an interest rate of 3.5 per cent will apply to the first $20,000 in the OA; a rate of about 5 per cent will apply to the next $40,000 in the Special, Medisave and Retirement accounts (SMRA).

Other changes include delaying the drawdown age for the Minimum Sum to 65 in 2018 and a new longevity insurance scheme.

From Jan 1, there will be a new interest rate on CPF savings. While the OA rate, which is pegged to bank rates, has been a guaranteed 2.5 per cent, the SMRA rate has been 1.5 per cent higher at 4 per cent.

Under the new system, the SMRA rates will be pegged to the previous 10-year Singapore Government Securities (SGS) rate plus 1 percentage point.

The average SGS rate is now 3 per cent, so the SMRA rate would be 4 per cent - the SGS rate of 3 per cent plus 1 percentage point.

To help members adjust to the floating rate, the Government will pay out a minimum of 4 per cent on the SMRA for the next two years.

This 4 per cent floor will also apply to the first $60,000 in the combined CPF accounts that enjoy a higher interest rate.

After two years, the 2.5 per cent floor rate will apply for all accounts as prescribed under the CPF Act.

Expert views

MOST financial advisers, such as Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, recommend that people should invest in higher-return assets to maximise their nest eggs.

Mr Leong said a diversified global portfolio has a 'very high probability' of achieving annual returns of 6 per cent over a five- to 10-year period.

'The longer one's time horizon is, the higher the probability is and the lower the risks are,' he pointed out.

The chief executive of wealth management firm dollarDEX, Mr Chris Firth, told The Sunday Times that, for long-term investors, 2.5 per cent or 3.5 per cent a year is not a good return.

'Even 5 per cent can be beaten in the long run with a good balanced fund or diversified portfolio without too much risk,' he said.

'Depending on the client's situation, I would advise investing CPF money in approved equities and bonds, regardless of the floor rate. Still, clients need to recognise the risks involved.'

Ipac financial planning's senior vice-president, Mr Scott Mitchell, said that if a member would need his savings in the short term, say, five years, then it made more sense to leave the funds in the CPF account.

Mr Firth said that for low-risk clients or those with short-term needs, the CPF floor rate returns could be seen as a risk-free investment.

Mr Joseph Chong, the chief executive of financial advisory firm New Independent, noted firmly that CPF members should leave the first $20,000 of their OA and SA savings with the Board.

'The Government is giving very good, risk-free rates, essentially protected against inflation. At 3.5 per cent, it's the real rate of return plus 1 per cent. Let this form a crucial part of your bond portfolio,' he said.

Ms Anne Tay, OCBC Bank's vice-president for group wealth management, noted that CPF members need to find an investment that pays at least 3.5 per cent - the CPF rate - for the first $20,000 in OA savings if they plan to take the cash from the Board.

'If you can find an investment that has a good track record of consistently beating the 3.5 per cent return mark, invest your money. Make it work harder for you,' Ms Tay advised.

As for the next $40,000 in the SMRA, she said it made sense to invest this money in products with consistent performance records that beat the hurdle rate of 4.5 per cent.

She is assuming that even if the 10-year Singapore government bond falls to 2.5 per cent, the new SMRA formula would give you 2.5 per cent plus 1 percentage point plus 1 percentage point - for a total of 4.5 per cent.

Ms Tay calculated that if the first $60,000 is left with the board, it will grow to $92,000 based on the new changes and a 10-year horizon.

If a member is prepared to take on the risks associated with higher returns, say, 7 per cent a year over 10 years, the amount will grow to $118,000. This means a difference of $26,000.

Over a 20-year period, the difference between leaving the amount with the Board and investing at 7 per cent a year would snowball into $93,800.

Potential risks

AS WITH most financial investments, there are risks involved in investing CPF savings.
Statistics showed that between 1993 and 2004, nearly three out of every four people who had invested under the
CPFIS ended up worse off than if they had just parked their money in their CPF accounts.

It is believed that these Singaporeans got burnt because of a lack of financial education.

Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, highlights some potential risks and concerns:

- Investing in products that are not diversified and not tailored to a CPF member's risk profile.
- Investments that come with high fees and sales charges. High fees will eat into returns.

One reason for the poor returns of unit trusts in the past has been the high cost of investing.

That is why the front-end sales charge for CPFIS-approved unit trusts has been capped at 3 per cent since July this year.

- The investment time horizon of CPF members.
- Other changes to the CPF that could affect investments.

Investing a lump sum now could mean timing the market wrongly.

Mr Lim says: 'This might be significant if we remember that many CPF members invested at the peak of the dot.com bubble in 2000.

'Many of their investments are still 'deeply under water'.'