Five things to know before investing your CPF

People often ask: ​​why should you invest your CPF Ordinary Account (OA) savings when the OA interest rate of 2.5% per annum is virtually guaranteed?

As of the first quarter of 2024, there are only around 1 out of 4.5 million CPF members who own an OA investment account under the CPF Investment Scheme (CPFIS). This means that a good majority still aren’t familiar with CPF investing. Whether you are on the fence or finding out how to invest your CPF OA monies, here are the 5 things to know before you do so:

1. You don't have to pay back any CPF interest lost

Any CPF OA monies withdrawn for a property down payment or monthly mortgage has to be paid back to CPF, with interest, upon the sale of your property. Termed “accrued interest”, it is effectively the interest that you should have earned if you were to leave your CPF untouched.

As we likewise "borrow" our CPF monies to invest, it may seem intuitive that CPF investments should also be liable to accrued interest. However, all CPF investments, be it OA or Special Account (SA) investments, are not liable for interest accrual.

2. You cannot withdraw any dividends or capital gains made on your CPF investments

As OA interest rate is only at 2.5% per annum, some people prefer to invest it through the CPFIS due to higher potential returns (albeit with higher risks).

Those looking for passive income may invest their money in high-yield dividend stocks, but note that any dividends received or capital gains from CPF investments must be transferred back to your CPF accounts. Only at age 55 and when you have met the Full Retirement Sum (FRS) in your Retirement Account (RA), can you withdraw from your OA. 

3. You have to pay agent bank charges for your CPF investment account

To invest your CPF, you have to set up a CPF investment account with local banks, namely DBS, OCBC, or UOB. As agent banks, these three local banks facilitate transactions of CPF monies for your investments on brokerages or fund investment platforms.

This service unfortunately does not come for free. The agent bank of your CPF investment account typically charges you fees such as a one-time transaction charge of about $2 to $2.50 (before GST) per transaction, and a recurring service charge of about $2 to $2.50 (before GST) per counter per quarter.

With DBS, for example, you are required to pay a transaction charge of $2.73 (inclusive of GST) per 1,000 shares or units purchased, if you're investing your CPF money in stocks, unit trusts, property funds, or exchange-traded funds (ETFs). In addition, there is a quarterly service charge of $2.18 per share counter you own, subject to a minimum charge of $5.45 (inclusive of GST) per quarter. These figures are from DBS' schedule of bank charges as of July 2024.

It's important to note that these agent bank charges for your CPF investment account are on top of any brokerage charges or any platform fees that you are paying.

If you were to diversify your CPF investments into different stocks, your agent bank charges will increase as well.

How you can reduce your agent bank charges:

i) Consolidate your holdings with a CPF Investment Administrator (CPFIA)

An Investment Administrator (IA) under the CPFIS can collate your transactions and submit them to CPF collectively, which helps to minimise your agent bank charges. CPF Investment Administrators are unit-trust distribution platforms that allow you to invest in diversified funds.

Given that Endowus’ partner broker, UOB Kay Hian, is an Investment Administrator, you will be charged lower agent bank fees as compared to investing via one that is not. 

Essentially, UOB Kay Hian can draw a consolidated amount of funds directly from your agent bank for all your CPF investments, so you will be charged a transaction and service fee on a portfolio basis, rather than on a per-security basis. There are also no transaction fees to rebalance or switch portfolios.

For example, as an Endowus client, if you buy seven funds for your portfolio, you will only be charged a fixed amount of up to $2.50 (before GST) for the transaction, instead of paying $2.50 per 1,000 units of the fund and multiplied by seven times.

Similarly, the service fee will be up to $2 (before GST) per quarter for your portfolio, rather than $14 per quarter ($2 x 7).

Both the transaction and quarterly service charges are regardless of the size of the transaction.

ii) Invest a larger sum, and minimise your trading frequency

Investing a larger amount of money in each transaction can lower your cost on a percentage basis, as the table below illustrates.

For example, if you invest only $100, paying a $2.73 transaction charge to the agent bank is an immediate 2.7% cost. Let’s say you hold the investment for a year — after factoring in the $5.45 in quarterly service charges, the total agent bank charges are costing you some 24.5% of your investment value in one year.

But if you make a $1,500 investment in a single transaction (assuming that amount buys not more than 1,000 shares or units), the charges will take up only 1.64% of the investment value.

One-off CPF investment: impact of agent bank charges

This table shows a simple illustration of the cost of different agent bank charges, as a percentage of the investment value, if you made a one-time CPF investment in stocks or unit trusts.

Therefore, try to minimise your investment frequency, so that you are able to invest a bigger amount each time. 

Setting a recurring investment amount that is more than $500, through a CPF Investment Administrator, is a good way to minimise the unnecessary costs from agent bank charges. 

Also, if you’re able to commit bigger amounts over a longer period of time, that can also help to reduce the quarterly service charges.

Monthly recurring CPF investment: impact of agent bank charges

This table shows a simple illustration of the cost of agent bank charges, as a percentage of the total investment value, if you made a monthly recurring CPF investment in stocks or unit trusts for a year.

4. Your CPF withdrawals might cause you to incur rejected trade penalties

As you are allowed to invest only monies in excess of $20,000 in your OA and $40,000 in your SA, it's important to ensure that you have sufficient funds in your CPF account to fund each investment transaction as well as to pay the relevant agent bank charges and platform fees.

Also, sometimes we may have recurring CPF withdrawals that could cause us to have an insufficient balance for CPF investments. This will lead to an unsuccessful transaction.

To process every transaction that failed — usually due to insufficient funds in your CPF account — the agent banks will charge a penalty fee of about $5 (before GST). This is typically called a cancellation-of-trades charge or a rejected-trades charge.

A few types of CPF withdrawals that may cause you to have insufficient balance for CPF investments include:

1. Insurance premiums from your Dependants' Protection Scheme
2. Agent bank charges for CPF investments, such as transaction and quarterly service charges
3. Mortgage and other housing-related payments
4. Platform or access fees for your CPF investments

5. The financial markets are volatile

While we all want to get a positive return on our equities investments above the OA interest rate of 2.5% per annum (essentially a risk-free return), investment returns are not guaranteed, and the markets can be highly volatile in the short term. 

For example, the US market performance has hovered at its all-time high for some time, but it is not without volatility. The index moves have been oscillating, driven by the performance of the Magnificent 7 stocks, investor sentiment reacting to Fed Speak, macroeconomic prints, and geopolitical events. 

You may feel tempted to sell your CPF investments during market declines in order to cut your losses. In fact, historically, the markets have always bounced back from financial crises. While market corrections are painful in the short term, volatility, featured as prices moving up and down is a feature of investing, not a bug. It is a conscious choice as an investor to tolerate these fluctuations for a higher expected return.

Staying invested and keeping a rational, reasonable approach will help us find peace of mind in times of volatility and uncertainty. Remember that retirement monies, such as your CPF savings, are meant to be invested with a long-term horizon in mind. The savings are worked harder so they have the best chance of reaping good returns by passively tracking the market through low-cost, diversified funds.

By committing to a long-term investment plan, you have a greater chance of doing better than the 2.5% p.a. interest rate of the CPF OA. With the power of compound interest, your investments can also grow significantly over the long run.

Likelihood of investments outperforming the CPF OA interest rate

Historical data shows that OA interest rates have not kept up with inflation rates in Singapore. This essentially means that the purchasing power of your OA savings is eroding over time, which is why it is worth taking a closer look at CPF investing if you haven’t started.

This table below shows the periodic success rate over the CPF OA interest rate, such as how often the following indicators or market indices performed above 2.5%, over different time periods.

As seen from the table above, over a short investment horizon of just one year, there is a fair chance of investors doing worse than the CPF OA interest rate, regardless of what they invest in. For instance, there was only a 67% chance that investing in global stocks (represented by the MSCI All Country World Index) would outperform 2.5% p.a. during the course of a year.

However, this likelihood of success becomes much higher when they stay invested for longer timeframes of a decade and above. Those who invested in global investment-grade bonds (represented by the Bloomberg Global Aggregate Index) virtually always did better than the 2.5% rate over a 5-year, 10-year, 15-year, or 20-year period. A balanced portfolio of 60% stocks and 40% bonds could do better than the 2.5% rate when the investment horizon was a decade or longer.

Starting your CPF investment journey

With these five tips at hand, you should now be more confident and better prepared to start investing your CPF monies. CPF is an important part of our retirement goals, and we should be cautious with managing and investing it.

At Endowus, Singapore’s first and only CPF digital advisor, you get exclusive access to low-cost, best-in-class index funds that track benchmarks such as the S&P 500 Index. 

Investing your CPF with Endowus can be done entirely online by linking your Endowus account with your CPF investment account. We are also the only platform that provides 100% Cashback on trailer fees. This way, you can keep more of your returns.

Our Flagship CPF Portfolios are personalised based on your specific risk profile and wealth goals, and are created with low-cost, best-in-class funds. We focus on diversified funds with broad-market exposure, suitable for clients planning for retirement over the long term. 

In July 2024, the Flagship CPF series has undergone a major upgrade by including three funds managed by Dimensional Fund Advisors. Read how the latest upgrade to the Flagship CPF Portfolios continues to align your investment exposure with your investing success. 

Find out how CPF prepared you are, by using our Investment Plan Calculator. To know more about CPF investing with Endowus, click here.

Read more:

• 5 key CPF changes you should know in 2024
• How Endowus improved CPF investing in Singapore
• Can your CPF savings keep up with high inflation?
• Closure of the CPF Special Account — all you need to know