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Interest Rates

>> Wednesday, October 5, 2011

The CPF Board has announced that the minimum floor rate of 4% in the Special, Medisave and Retirement Account (SMRA) will be extended by another year to Dec 2012.

From 2008, the SMRA rate was announced to be pegged to the 12-month average yield of the 10-year Singapore
Government Securities (10YSGS) plus 1%, subject to a floor rate of 2.5% per annum.

However, the government had kept a floor rate of 4% till the end of 2009 in order to help people cope with the transition. Subsequently, the government extended the 4% floor rate for year 2010 and once more for this year, 2011.

This time round will be the third extension for year 2012.

If they had not kept the extension for the 4th year running, the average yield of the 10YSGS plus 1%, from 1
September 2010 to 31 August 2011, works out to be 3.30%, which is lower than 4%.

I suppose it will keep extending till the yield of 10YSGS plus 1% is close to, if not higher than 4%. This is of course great news, as with the additional 1% bonus interest, $60k in the CPF is enjoying government guaranteed
"risk-free" 5% returns.

On the flip side, a piece of bad news is DBS Group, Southeast Asia's largest lender, said it would cut interest rates for Singapore dollar deposit accounts from Oct 14.

From an insignificant 0.1% for most deposits, the decimal place will be shifted to become 0.05%. Percentage change wise, it is a stunning 50% cut! Those who are so risk adverse and still leave huge amounts in savings account, it is time to reassess the situation. This is a definite erosion of value with inflation stubbornly high and a clear signal that rates are not going to recover to near 1% levels any time soon.

Those aged 50 - 62 can consider transferring excess savings to CPF.

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