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Photo: Dollars and Sense In a previous article written about financial planning after becoming an entrepreneur, I shared about how my wife and I did a CPF transfer from our Ordinary Account (OA) to our Special Account (SA) in 2015 and 2016 in order to enjoy higher interest rates. |
Reason for Transferring: Higher Interest Rates
Monies in your OA earn a base interest rate of 2.5% per annum while monies in your SA earn a base interest rate of 4% per annum.
To some, the difference of 1.5% may not seem like much. If you read the Business Times article in the link above, you can see this was one of the main reasons cited on why the writer didn’t feel a CPF transfer was justified. However, we feel this is a bad way to understand the situation.
You see, when you do a CPF transfer to your SA, you should be concerned about how the figures pan out when you are at age 55, not today. Seeing the difference on a year-to-year basis is irrelevant, since money in your CPF can’t be used for most things anyway, unless you are buying a home.
The power of compound interest makes the difference a lot more than just 1.5% per annum. It’s hard to understand this without seeing actual figures. Here’s a simple example of the difference in your CPF OA and SA based on a sum of $10,000 that an individual has at age 30.
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Age |
OA |
SA |
Difference |
|
30 |
$10,000 |
$10,000 |
$0 |
|
55 |
$18,539 |
$26,658 |
$8,116 |
|
65 |
$23,732 |
$39,461 |
$15,729 |
The table above shows that the difference is very significant. Over a 20-year period, the cost of enjoying the flexibility of keeping funds in your OA is about $8,000 for every $10,000 you keep in your OA.
Think about it. If you are 30-year-old this year. The cost of wanting to keep $10,000 in your CPFOA (unused) would be more than $8,000 by the time you are 55, and more than $15,000 by the time you are 65.
Before we proceed further, here are some misconceptions that we also like to dispel.
There is no tax relief from transferring your CPFOA to your CPFSA. You only get tax relief if you do a voluntary CPF cash top up.
At age 55, you are able to withdraw any excess amount above what you have set aside in your CPF Retirement Account (RA). In other words, doing a transfer from your OA to your SA will not change the amount you are allowed to withdraw at age 55.
Transfers are irreversible. Once you transfer OA funds to your SA, you can’t transfer it back. This is more of a reminder, rather than a misconception.
What You Lose Out Once You Transfer Funds from Your OA to Your SA
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"... You can no longer use your CPF monies for property purchase once it is in your Special Account." |
Funds in your SA have restricted usage compared to funds in your OA.
The most important of this usage is that you can no longer use your CPF monies for property purchase once its in your SA.
For CPF members who have yet to buy a property, our view is that they should keep their funds in their OA until they have bought a property, unless they 1) don’t intend to buy a property or 2) have sufficient cash to buy a property without needing to rely on their CPF.
The reason for this is simple; In our view, we think it is better to have less money in your RA at age 55 and to own a home, then to have more money in your RA but to not own a home, because you couldn’t afford the down payment and monthly mortgage having transferred money from your OA to your SA during earlier years.
Why Keep Excess Funds in Your OA If You Are Not Going to Use It
As far as the discussion goes, the point that many people tend to overlook when searching for an answer to their question is that they neglect to include their own personal circumstances into the equation.
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"The additional interest they would have earned ($150/year for every $10,000) is not worth giving up for compared to the flexibility of being able to use their OA funds to help with the purchase of a home." |
To give you a perspective of what this entails, we asked members of our own team on the reasons why they would or would not do a CPF transfer today.
Not Transferring: Some of our colleagues are looking to buy their own properties in the next 1-2 years. For them, it makes no sense to do a transfer today. The additional interest they would have earned ($150/year for every $10,000) is not worth giving up for compared to the flexibility of being able to use their OA funds to help with the purchase of a home.
Transferring: Having set aside sufficient funds in their OA to pay for the monthly mortgage for the next 12 or more months, some are comfortable with transferring the excess amount from their OA to their SA. This allows them to enjoy higher interest rates, while still ensuring that they have sufficient liquidity buffer in the OA, in the event that its needed if they have a temporary loss of employment income.
Transferring to Your SA Is Only a Tool: Financial Planning Needs to Make Sense for You
The optimal way to use financial planning instruments like CPF is to first understand how it works, and to make the decisions that make sense to you as an individual, rather than to follow what others are saying and doing.
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"For CPF members who have yet to buy a property, our view is that they should keep their funds in their OA until they have bought a property, unless they 1) don’t intend to buy a property or 2) have sufficient cash to buy a property without needing to rely on their CPF." |
The transferring of funds from OA to SA fall under one of the decisions where there is no clear right or wrong, but rather, whether doing so makes sense for an individual or not.
Have you transferred funds from your OA to your SA previously? Share with us the reasons why you did so on our Facebook Page. Alternatively, if you have a question about this topic, ask us on Facebook and we hope to do our best to answer them.
This article is republished with permission from Dollars and Sense.