To help Singaporeans build up long-term savings for retirement, medical expenses and to pay for their housing, our CPF savings earn us a risk-free interest of between 2.5% to 6.0% p.a.
For Singaporeans, the importance of our CPF interests cannot be understated.
Our CPF interest compounds itself automatically, allowing us to accumulate our savings over the long term without needing any investment knowledge. Nor do we need to pay any transaction or management fees to someone to grow our savings for us.
When Do We Receive Our CPF Interest?
Unlike most savings accounts where interest is usually credited monthly, CPF interest is paid to us once a year. According to the CPF website, CPF interest is credited to our accounts by 1 January of the following year and compounded annually. For example, for my 2023 CPF interest, I was credited with the interest on 31 December 2023.
How Our CPF Balance Are Calculated
While interest is paid once a year during year-end, our CPF interest is computed monthly.
What this means is that our CPF balance each month determines the amount of interest we earn at the end of the year, and not the year-end balance that we have.
Here’s an illustration to explain how the math works.
To keep things simple, we assume that the CPF balance only changes once every three months and that the assumption here is that the interest rate is 4.0% p.a. However, in reality, the CPF Ordinary Account interest rate is lower than that of the Special Account and MediSave.
CPF Balance (4.0% p.a.)
Interest Earned
January to March
$100,000
$333.33 X 3 = $1,000
April to June
$125,000
$416.67 X 3 = $1,250
July to September
$150,000
$500 X 3 = $1,500
October to December
$200,000
$666.67 X 3 = $2,000
Total Interest Earned For The Year
$5,750
In our illustration, even though the year-end balance is $200,000, the interest we receive isn’t $8,000 (4% of $200,000).
Rather, the interest we receive at the end of the year -$5,750 – is an accumulation of all the interest that we earn each month based on our monthly balance.
How Are Monthly Balance Computed?
One key thing to note is that the CPF monthly balance is based on the lowest balance amount for the month.
For example, if we have $100,000 in our CPF Ordinary Account (OA) on 1 July and decide to withdraw $25,000 to invest in treasury bills on 15 July. Subsequently, we receive a top-up of $25,000 back to our CPF account on 30 July. Even though we started and ended the month with $100,000, our CPF balance for July will be considered as $75,000, the lowest balance amount during July.
How CPF Interests Are Credited To Our Account
The base interest rate for CPF OA is 2.5% p.a. For our CPF Special Account (SA), Retirement Account (RA) and MediSave accounts (MA), the base interest rate is 4.0% p.a. However, for the latest round of CPF interest rates review, our Special, MediSave and Retirement Accounts (SMRA) will earn 4.08% from January to March 2024.
For base interest earned, the interest goes into the respective account. This means our OA interest goes into OA, our SA interest goes into SA and our Medisave interest goes into our MA.
The only exception here is if our MA already hits the Basic Healthcare Sum (BHS) ($71,500 as of 2024). In this scenario, the Medisave interest will flow into our SA or RA (for those 55 and above).
Does It Make Financial Sense To Max Out Your MediSave Account To The Basic Healthcare Sum?
However, we can earn extra interest in two additional ways
Firstly, we earn extra interest of 1.0% on the first $60,000 of our combined CPF balances, with up to $20,000 coming from our OA. The extra interest earned on our OA and SA will be credited to our SA, or RA if we are 55 and above. The extra interest earned on our Medisave will still go to our MA unless we already hit the BHS.
Secondly, those 55 and above will get an additional 1.0% interest on the first $30,000 of combined CPF balances. This is on top of the extra 1.0% for the first $60,000 of combined CPF balances. The extra interest earned on our OA and RA will be credited to our RA, the extra interest earned on our SA will go into our SA and Medisave interest will go into MA unless we have already hit the BHS.
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