To enjoy 4% interest rate, top up your CPF

The Straits Times. Sep 15, 2009.
By Lorna Tan

With bank interest rates at an all-time low, Singaporeans are on the constant lookout for alternatives that provide higher returns.

The Central Provident Fund (CPF) Minimum Sum Topping-Up Scheme, which pays 4 per cent for a portion of your CPF savings, is one option.

The Minimum Sum is the amount that you set aside in your Retirement Account at age 55 for your retirement needs. This account will be used to fund monthly payouts for members after a certain age. It need not be all in cash. Up to 50 per cent of this sum can be a property pledge.

The Special and Medisave Accounts will be pegged to the interest rate of 10-year Singapore Government Securities plus 1 percentage point. The Retirement Account and the CPF Life funds will earn a weighted average interest on a portfolio of government bonds.

Besides the SMRA, there is the CPF Ordinary Account, which earns an annual interest of 2.5 per cent.
The first $60,000 of your SMRA including up to $20,000 from the Ordinary Account earns an extra 1 percentage point. This means that if you have $20,000 in your Ordinary Account, it earns 3.5 per cent while $40,000 in your SMRA currently earns 5 per cent.

Note that the first $30,000 and $20,000 in your Special Account and Ordinary Account, respectively, cannot be used for investment.

Here is how the Minimum Sum Topping-Up Scheme works.
Note that the top-ups are irreversible.

1 Top up your CPF account with your CPF savings

You can transfer your Ordinary Account savings to your Special or Retirement Account to earn the 4 per cent rate. You can transfer any amount and as often as you wish. However, the total savings in your Special or Retirement Account, inclusive of the amount withdrawn for investments, should not exceed the prevailing CPF Minimum Sum after the transfer.

2 Top up your loved ones' CPF account with your CPF money

To make the top-up using your CPF Ordinary Account, the net balances in your Ordinary and Special or Retirement Accounts, including the amount withdrawn for investments, must be more than the prevailing Minimum Sum.

Your loved ones may include your grandparents, parents, siblings and spouse. After the top-up, the total savings in their Ordinary and Special or Retirement Accounts, inclusive of the amount withdrawn for investments, should not exceed the prevailing Minimum Sum.

3 Cash top-ups

You can use cash to top up your and/or your loved ones' Special or Retirement Account, up to the prevailing Minimum Sum cap. For cash top-ups to loved ones' accounts, you need not satisfy the prevailing Minimum Sum cap in your CPF.

An advantage of using cash is that it can bring a tax benefit. You can get tax relief of up to $7,000 per calendar year for cash top-ups to yourself and additional tax relief of up to $7,000 a year if you make cash top-ups to siblings, spouse, parents or grandparents.

Note that to qualify for tax relief for this latter cash top-up, the sibling or spouse must not have earned more than $2,000 in the preceding year.

Finally, to make the best use of the guaranteed 4 per cent CPF rate, you should avoid investing money in your Special Account if your investments cannot earn you more than 4 per cent in returns annually.

After all, leaving money in your Special Account is risk-free and the interest is guaranteed at 4 per cent at least until the end of next year.