One of the ways to grow your retirement funds over the long-term is to invest your CPF. Under the CPF Investment Scheme (CPFIS), you can invest your CPF Ordinary Account (OA) and Special Account (SA) balances in various investment products such as stocks, bonds, unit trusts (mutual funds).
By default, Singaporean government guarantees a 2.5% p.a. interest for savings in CPF OA, and 4% p.a. interest in the Special Account (SA). An extra 1% p.a. interest is paid on the first S$60,000 of your combined balance (including up to S$20,000 from your OA).
Having said that, by investing CPF OA and SA you can potentially earn a higher return than the guaranteed interest rates above, which, due to inflation, may not grow your wealth enough for you to retire comfortably.
Here are a few important things about the CPF Investment Scheme (CPFIS) that you should bear in mind before deciding if you should invest your CPF.
Who can invest with CPF?
Since 1 October 2018, new investors need to take the Self-Awareness Questionnaire (SAQ) before you can even start investing via CPF-IS.
Next, you can only invest your savings through the CPF-IS if you have more than $20,000 in your CPF-OA and/or $40,000 in CPF SA. You must also be at least 18 years of age and not an undischarged bankrupt.
How much can I invest with CPF?
After setting aside the minimum amount in your OA and/or SA, you can invest 100% of your investible savings in unit trusts, up to 35% in stocks and up to 10% in gold. If you want to check your investable amount, you can login to your CPF account here and go to My Statement > Section C to check.
What asset classes can I invest in?
Through the CPFIS, CPF members can use their CPF monies to invest in CPF-approved stocks and bonds, which are listed in SGX, unit trusts/mutual funds, fixed deposits, and even investment-linked products (ILPs).
Can I withdraw my CPF investment return?
Any gains you make in your investments using funds from your CPF accounts will be returned to your CPF accounts(after fees) and can only be withdrawn when you reach 55 years old. For example, if you invest $10,000 into a stock today using your OA funds and sell it for $12,000 a year later, the entire amount, inclusive of profits, will be returned to your CPF account. This means that every investment which is made from your CPF account is really for your future-self.
Similarly, any dividends or interest you receive on your CPF-IS investments will be channelled to your CPF accounts rather than be paid out to you. These funds can then be used to make further investments if you wish.
Should I invest in CPF? Investment factors to consider in decision-making:
1. Your investment period
CPF currently pays 2.5% interest on savings in your CPF-OA. There is an extra 1% interest paid on the first S$60,000 of your combined balance (including up to S$20,000 from your CPF-OA). These are essentially risk-free returns guaranteed by the government, so if capital preservation is your primary concern, especially if you intend to make use of your CPF OA for housing/educational purposes in the next 3 years then you are encouraged to keep your money in your CPF OA.
We believe in the power of the markets and long-term investing, and that over a long time period your investment portfolio has a high probability of performing better than the guaranteed interest rates in your CPF account, especially if you are investing in a diversified, low-cost manner.
2. Your risk tolerance
As an investor, it's important that you consider the risk-return trade-off that you are taking on. Since interest earned in your CPF accounts are essentially risk-free and guaranteed by the government, one should expect higher returns when investing elsewhere. At the same time, you should carefully consider how much additional risk you are taking on in order to earn this higher return elsewhere.
Investing in securities such as individual stocks, bonds, ETFs and unit trusts come with a higher level of risk and volatility compared to leaving your money in your CPF. Make sure you do your own due diligence before you invest your CPF funds, and choose an investment portfolio that is appropriate for your risk tolerance and investment goals.
Remember, the risk-return trade-off is something which you should be comfortable accepting before you invest.
3. Investment fees
Watch out for investment fees as well. Most investment instruments you can invest in will charge some form of fees. These include sales charges, management fees, wrap fees and brokerage fees. As mentioned in a previous article we wrote, even a 1% difference in fees can amount to a significant cost over the long-run. This is in contrast with keeping your funds in your CPF account, which incurs no additional fees.
Overall, when investing through the CPFIS, it makes sense to take a long-term approach. Over time, markets display efficient characteristics and investors are rewarded commensurately for the risks that they take. We believe it's time in the markets that will give you the highest probability of success in growing your wealth over the long-term.
Endowus can help you curate a personalised CPF investment portfolio adjusted to your needs and risk tolerance. Invest in your future, learn more here.