Five things to note before investing your CPF
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Five things to note before investing your CPF

Mar 2023
Apr 2021
5 things to take note of before investing your CPF
  • Dividends or capital gains made on your CPF investments cannot be withdrawn. Therefore, OA investments tend to be held for a longer time.
  • You will have to pay agent bank charges — but there are ways to reduce this amount.
  • Financial markets are volatile. You have a higher chance of getting better returns by committing to a long-term investment plan.
  • To start investing your CPF with Endowus, click here.

Getting started on investing your Central Provident Fund (CPF) monies can feel a lot more intimidating than investing with cash.

After all, less than a quarter of CPF members have invested their CPF Ordinary Account (OA) savings — according to the CPF Board's latest annual report, only 977,000 members invested their OA savings, out of a total of 4.1 million CPF members as of December 2021. That means CPF investing remains an unfamiliar experience for many in Singapore.

But fret not — here are five tips for you to help you start your retirement planning journey through CPF investments.

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

Many of us are familiar with the concept of CPF accrued interest for a property purchase. Any CPF OA monies withdrawn for a property down payment or monthly mortgage has to be paid back to CPF, with interest, upon the sale of our property. This accrued interest is effectively the interest that we should have earned if we were to leave our 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 CPF Investment Scheme (CPFIS) 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

Some of us invest to create passive income for ourselves: We specifically pick high-dividend yield stocks to generate cash flow. Unfortunately, deploying this strategy is challenging when investing through CPFIS, as any dividends received or capital gains realised must be transferred back into our CPF accounts.

We will then only be able to withdraw our CPF OA and SA monies at 55. Moreover, CPF SA monies have to be withdrawn first, before OA monies can be withdrawn.

Given that we cannot access OA monies first, we may prefer to hold on to our CPF OA investments for a longer period of time.

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

Before you can even use your CPF savings for investing, you have set up a CPF investment account with 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're required to pay a transaction charge of $2.70 (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 $2.16 per share counter you own, subject to a minimum charge of $5.40 (inclusive of GST) per quarter. These figures are from DBS' schedule of bank charges as of February 2023.

It's important to note that these agent bank charges for your CPF investment account are also 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.

There are two simple ways to 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 a CPFIA, you will be charged lower agent bank fees as compared to investing via a non-IA. Essentially, UOB Kay Hian can draw a consolidated amount of funds directly from your agent bank for all your CPF investments, which means 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 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 $2.70 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 $5.40 in quarterly service charges, the total agent bank charges are costing you some 24.3% 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 transaction charge costs you only 0.18%. In total, including the quarterly service charges, after a year that will cost you 1.62% 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.

One-off investment* Transaction charge
Quarterly service charge, for a year
($5.40 per quarter)
Total agent bank charges** for a year
$100 -2.70% -21.6% -24.3%
$500 -0.54% -4.32% -4.86%
$1,000 -0.27% -2.16% -2.43%
$1,500 -0.18% -1.44% -1.62%

Source: Endowus Research
*Assumes the investment value purchases up to 1,000 shares or units. This is considering that the agent bank transaction charges of $2 to $2.50 (before GST) are applicable for every 1,000 shares or units.
**Total agent bank charges are made up of the transaction charge and the quarterly service charge x 4.
Note: Figures shown here are calculated based on the DBS CPF investment account bank charges, inclusive of GST, as of February 2023. Alternatively, you may wish to select another agent bank such as OCBC or UOB (UOB is the lowest-cost agent bank as of March 2023) for your CPF investment transactions.

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 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.

Monthly recurring investment* Total investment value after a year** Transaction charge
($2.70 per transaction)
Quarterly service charge, for a year
($5.40 per quarter)
Total agent bank charges^ for a year
$100 $1,200 -2.70% -1.80% -4.50%
$500 $6,000 -0.54% -0.36% -0.90%
$1,000 $12,000 -0.27% -0.18% -0.45%
$1,500 $18,000 -0.18% -0.12% -0.30%

Source: Endowus Research
*Assumes the monthly investment value purchases up to 1,000 shares or units in each transaction. This is considering that the agent bank transaction charges of $2 to $2.50 (before GST) are applicable for every 1,000 shares or units.
**Before any capital gains or losses.
^Total agent bank charges, for a year, are made up of the transaction charge x 12 (for the recurring investment every month), and the quarterly service charge x 4.
Note: Figures shown here are calculated based on the DBS CPF investment account bank charges, inclusive of GST, as of February 2023. Alternatively, you may wish to select another agent bank such as OCBC or UOB (UOB is the lowest-cost agent bank as of March 2023) for your CPF investment transactions.

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

Some of us are willing to invest all our available CPF savings as we will not be able to use the money until we retire. We may set up our recurring CPF investments in such a way that any CPF contributions from work can be fully used for investments.

However, it's important to make sure 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, between February and March 2020, the S&P 500 fell more than 30% in this short span of time, before recovering fully within the next two quarters.

You may feel tempted to sell your CPF investments during market declines in order to cut your losses. But, historically, the markets have always bounced back from financial crises — while market corrections are painful in the short term, they are a feature of investing, not a bug. It is a conscious choice as an investor to tolerate these ups and downs 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

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

Period (years) Savings deposit rate Singapore inflation Global IG bonds Global stocks Developed market stocks US stocks Balanced portfolio
1Y 0% 20% 75% 67% 66% 75% 70%
3Y 0% 24% 93% 73% 71% 73% 77%
5Y 0% 23% 99% 63% 63% 64% 71%
10Y 0% 17% 100% 79% 78% 77% 85%
15Y 0% 0% 100% 82% 79% 92% 100%
20Y 0% 0% 100% 100% 100% 100% 100%

Source: CPF Board, Department of Statistics Singapore, Morningstar
Note: Based on January 1990 to September 2019 monthly rolling data, in SGD. Savings deposit rate refers to interest rates offered by Singapore banks for savings deposits. Global investment grade (IG) bonds are represented by the Bloomberg Global Aggregate Bond Index (BBGA). Global stocks are represented the MSCI All Country World Index (ACWI). Developed market stocks are represented by the MSCI World Index. US stocks are represented by the S&P 500 Index. The balanced portfolio, with 60% stocks and 40% bonds, is represented by 60% MSCI ACWI and 40% BBGA.

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 stayed 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 CPF digital advisor, you get exclusive access to low-cost, best-in-class index funds that track benchmarks such as the S&P 500. 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, so you 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, diversified funds. We focus on diversified funds with broad-market exposure, suitable for clients planning for retirement over the long term.

Find out how CPF prepared you are, by using our CPF Calculator. To get started on CPF investing with Endowus, click here.

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