We can’t ignore our CPF account balances in Singapore. Each month, we make mandatory CPF contributions worth up to 37% of our salary. Doing this over three to four decades in the workforce, our CPF balances can compound to a substantial amount – that will ultimately provide lifelong income in our senior years via monthly CPF LIFE payouts.
When we are younger, more funds are channelled into our Ordinary Account (OA). As we gradually age, a larger proportion is funnelled into our Special Account (SA) and MediSave Account (MA) for our retirement and healthcare needs instead.
When we hit 55, a new Retirement Account (RA) is opened for us to set aside our retirement funds for our golden years. From 2025, this move will be accompanied by the closure of our Special Account – which means we continue building our retirement nest egg through monthly CPF contributions from working.
Understanding how the CPF system works, and the interest rates it pays, allows us to maximise the scheme and make better financial decisions.
How Much Interest Do We Earn On Our CPF Balances?
The best part about our CPF contributions is that they start earning a return immediately. We do not need to make any investment decisions nor take on any investment risk to earn a relatively good interest return.
CPF interest rates are reviewed each quarter. In the latest review, our Special, MediSave and Retirement Accounts (collectively termed SMRA) will earn 4.14% from October to December 2024.
CPF AccountsInterest RateOrdinary Account (OA)2.5% (Floor Rate: 2.5%)Special Account (SA)
Retirement Account (RA)
MediSave Account (MA)4.14% (Floor Rate: 4.0%)
As we can see, our Special Account, Retirement Account and MediSave Account are paying above the 4.0% floor interest rate. This is because CPF interest rates are not fixed. According to the CPF Act, a formula governs the calculation of interest returns on our CPF balances.
Given the rapid increase in global interest rates in the past 2 years, it is also perhaps not very surprising that the formula that is used to calculate CPF interest rates has risen significantly.
CPF AccountsInterest Rate FormulaFloor Interest RateOrdinary Account (OA)80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates
Calculated Interest Rate: 0.45%2.5% per annumSpecial Account (SA)12-month average yield of 10-year Singapore Government Securities plus 1%
Calculated Interest Rate: 4.14%4.0% per annumMediSave Account (MA)Retirement Account (RA)
In addition, the legislated minimum interest rate that our CPF balances must earn is 2.5% per annum. The higher floor rate of 4.0% interest return on our Special Account (SA), MediSave Account (MA) and Retirement Account (RA) is technically not mandated, but is a commitment that the government has made.
We can expect the next quarterly reviews of our CPF interest rates some time in December 2024 for the January to March 2025 quarter.
Read Also: Why CPF Needs To Review Interest Rates For Our Ordinary, Special, MediSave And Retirement Account
We Also Receive Extra Interest Rates On Our CPF Balances
Extra Interest Rate
On top of the interest rates paid on our CPF balances, we are also paid an extra interest of 1.0% p.a. on the first $60,000 of our combined CPF balances (with up to $20,000 from our OA). This move was implemented in 2008 to help those with smaller CPF balances to compound their savings at a faster rate.
The $20,000 cap on balances that can come from our OA balances can be significant. For example, if we have $40,000 in our OA, and $10,000 in our SA and another $10,000 in our MA, we will not fully benefit from the extra interest rate of 1.0% despite having $60,000 of combined CPF balances.
As only a maximum of $20,000 can come from our OA, we will receive extra interest on $20,000 from OA, $10,000 from SA and $10,000 from MA in this scenario.
One other difference is that the extra interest earned on our OA balances will be paid into our Special Account (if we are under 55) or Retirement Account (if we are over 55). The extra interest earned on our SA and MA will flow into the respective accounts.
For the scenario above, here’s what it looks like:
CPF AccountCPF BalanceInterest Rate We ReceiveExtra Interest RateOrdinary Account$40,0002.5%1.0% on $20,000 (paid into SA)Special Account$10,0004.14%1.0% on $10,000MediSave Account$10,0004.14%1.0% on $10,000Total$60,0003.05%1.0% on $40,000
This is why we may read that those under the age of 55 can receive up to 5.0% interest on our CPF balances or that we may earn up to 3.5% on our Ordinary Account balances. These figures are not applied uniformly to our entire CPF balances. Instead, they only apply to the first $60,000 of our CPF balances — that too with restrictions on the first $20,000 coming from our OA.
If global interest rates remain elevated, these numbers may even adjust upwards in subsequent interest rate reviews. In fact, we will already earn up to 5.14% on our Special and MediSave Account balances from October to December 2024.
Additional Extra Interest Rate
Those 55 and above will also be paid an additional extra interest of 1.0% on the first $30,000 of combined CPF balances. This is on top of the extra interest on the first $60,000 of combined CPF balances.
The additional extra interest rate is also capped on up to $20,000 that can come from our Ordinary Account.
In another scenario, consider if we had $52,500 in our OA, and $5,000 in our RA and another $2,500 in our MA. We will first receive the extra interest rate of 1.0% on $5,000 in our RA. As this does not hit the $60,000 threshold, we will then receive the extra interest rate of 1.0% on the $20,000 in our OA, and $2,500 in our MA.
In total, we will receive the extra interest of 1.0% on $27,500 despite having $60,000 in combined CPF savings.
Furthermore, we will receive another 1.0% additional extra interest on $20,000 in our OA, $5,000 in our RA and $2,500 on our MA. In total, we will receive the additional extra interest of 1.0% $27,500 as well despite having much more than $30,000 in combined CPF savings.
For the scenario above, here’s what it looks like:
CPFAccountCPFBalanceInterest Rate We ReceiveExtra Interest RateAdditionalExtra Interest RateOrdinary Account$52,5002.5%1.0% on $20,000 (paid into RA)1.0% on $20,000 (paid into RA)Retirement Account$5,0004.14%1.0% on $2,5001.0% on $2,500MediSave Account$2,5004.14%1.0% on $2,5001.0% on $2,500Total$60,0002.705%1.0% on $27,5001.0% on $27,500
Similar to the point above, this is why we may read that those above 55 can receive up to 6.0% returns on their CPF balances. And, in the October to December 2024 quarter, those above 55 can earn up to 6.14% on their CPF balances. Again, this is restricted to the first $30,000 of our CPF balances and only $20,000 can come from OA.
The post Complete Guide To CPF Interest Rates: Ordinary Account, Special Account, Retirement Account, MediSave Account (And Extra Interest Rates) appeared first on DollarsAndSense.sg.
