Whilst the prospect of investing can seem lucrative and enticing, it is not for everyone. Even if it is for you, one commonly asked question is: should I use my CPF savings to invest?
Once again, we invite Mr Wong Sui Jau, Retirement Planning Ambassador of iFast Corporation, to provide insights into investing and hear his opinion on the use of CPF savings for investments.
All investments carry risk. To determine whether investing is suitable for you, you first need to have an understanding of the products and your appetite for risk. If you are a low-risk investor, you may seek investments with lower risks in exchange for modest returns. On the other hand, if you are a high-risk investor, you may be very willing to accept the risks of volatile market fluctuations so that you can gain higher returns.
Based on your own risk appetite, you will need to assess on how willing you will be to take losses if the market is bad.
This depends on how confident you are in beating the CPF interest rate. The CPF interest rate of CPF Ordinary Account (OA) is 2.5%. The CPF interest rate of the CPF Special Account (SA) is 4%. In addition to that, the first $60,000 in your CPF gives an additional 1% interest (up to 3.5% in your OA and 5% in your SA).
In both cases, these interest rates are risk-free. If you are confident in beating these returns, you can consider using your CPF savings. Otherwise, you may be better off leaving your CPF savings in their respective accounts.
There may be some investment products which can potentially beat the returns from the OA interest rate of 2.5%. However, investors need to bear in mind that a higher return comes with a higher risk. If you do not have the financial expertise to manage your investments, beating the CPF interest rates may be challenging.
You have to meet the following criteria before you can invest your CPF savings.
a) are at least 18 years old
b) are not an undischarged bankrupt
c) set aside $20,000 in your CPF Ordinary Account, and/or
d) set aside $40,000 in your CPF Special Account.
In addition, you can only invest up to 35% of your investible savings in stocks and up to 10% of your investible savings in gold.
Even if you fulfill the criteria, it will be wiser to invest only if you have some knowledge on investments and the associated risks and returns. Otherwise, it’s better to continue earning the interest rates in the different CPF accounts.
For OA, you can invest in a wide range of products which are CPF-approved. They include fixed deposits, Singapore government bonds, Statutory Board bonds, stocks, gold, unit trusts, investment-linked products, selected exchange traded funds, shares, and corporate bonds.
For SA, you can only invest in fixed deposits, Singapore government bonds, Statutory Board bonds, selected exchange traded funds, and CPF approved unit trusts and investment-linked products. As your SA is used for retirement, the products you can invest in are of lower risk.
In the recent CPF Advisory Panel recommendations, the CPF LRIS¹ was introduced as a simple and low-fee investment option. Adopting a long-term investment approach, it is designed to provide a higher expected return by taking on some investment risks. For those not confident of making active investment decisions or navigating the wide range of investment offerings under CPFIS, this is an alternative.
However, as with all other investments, some risk must be taken in order to obtain higher expected returns.
¹More details on this scheme will be announced at a later date.