It sounds like a dream to retire early and never work again while allowing your money to pay for everything you need. If you’ve researched it enough, you’ll find that investing is a great way to meet your early retirement goals in record time.
Thankfully, Singapore’s government recognizes corporate investment’s financially enriching potential. For this reason, the Central Provident Fund (CPF) gives members the key towards increasing their retirement savings through the CPF Investment Scheme (CPFIS).
However, the CPFIS does not function like your typical stock market account or ETF. To reduce risk, CPF screens and reviews all CPFIS-compatible investment products. Plus, they impose investment amount limitations to prevent members from mindlessly investing in everything available in the market to eliminate high-risk losses.
Here is everything you need to know about CPFIS and how to start using it to increase your retirement savings.
What is CPFIS?
The CPF Investment Scheme is Singapore’s way of giving members control and a chance to increase their finances without taking out their savings to open an investment account. In doing so, members have lower exposure to added service fees inclusive of most commercial investment platforms.
On its own, CPF can provide its members enough savings increases thanks to its stable annual interest rate increases. Each account has varying interest rate increases, which guarantee modest increases by your retirement age:
- CPF Ordinary Account (OA): 2.5% plus bonus 1% interest on reaching S $60,000 (for those aged 55 years old: S $30,000) with a S $20,000 bonus cap.
- CPF Special Account (SA): 4% plus bonus 1% interest on reaching S $60,000 (for those aged 55 years old: S $30,000)
Keep in mind that no special CPF Investment Account exists. Your typical CPF OA or SA account allows you to make investments once you prove your eligibility.
However, using your investible savings can increase your CPF savings with a dependable portfolio supplementing these base interest increases. On the other hand, taking on additional investments means taking on additional risks. Still, CPFIS makes it possible to invest your CPF savings and exponentially increase your returns.
Are You Eligible for CPFIS?
Anyone with a CPF Ordinary Account or CPF Savings Account can invest using the CPF Investment Scheme (CPFIS). However, members must fulfill the following criteria for CPFIS eligibility:
- 18 years old above
- No bankruptcy history
- Ordinary Account: Above S $20,000
- Special Account: Above S $40,000
- Have passed the Self-Awareness Questionnaire
CPF designed the Self-Awareness Questionnaire (SAQ) to measure the financial aptitude of anyone applying to open a CPF investment account. To aid members before they take the SAQ, CPF provides several learning modules.
These modules shorten a member’s research time because they contain useful and updated information about investment concepts, terms, products, and other information that supplements a member’s knowledge.
However, only members who pass the SAQ can fulfill all their CPFIS requirements and use their investible savings to open a CPF investment account.
CPFIS Investment Limits
CPF members eligible for CPFIS can only invest up to 35% of their investible savings in stocks. Plus, you can only invest 10% of your investible savings on gold and gold-linked products. These safeguards guarantee the best member risk protection from the CPF.
Investible savings refer to the total amount you’ve saved, inclusive of any house and education amount you’ve withdrawn in the past. Therefore, if your CPF has S $40,000 and you’ve paid S $30,000 for your home and S $10,000 for education, you have S $80,000 as your total investible savings.
Therefore, you can only invest S $28,000 on stocks and S $8,000 on gold ETFs and gold-linked products. CPFIS will automatically prevent your account from going over these limits.
Undeniably, many CPF members may invest their entire investible savings on high-risk products. Take note: CPF-vetted financial products do not guarantee zero risks. We’ll discuss more on this later.
Products Available From CPFIS
Virtually every financial product in Singapore is available when investing your CPF funds. Anyone with a CPF account can invest in the following products. Read more about each of them below.
These financial products function like mutual funds. However, instead of pooled mutual fund money, the investment returns head straight for investors.
CPFIS offers a great roster of unit trusts for CPF OA owners. However, for CPF Savings Account owners, they can only invest in CPF-vetted low-risk UTs.
Investment-Linked Insurance Products (ILPs)
Insurance guarantees you have recourse when something undesirable happens. To help insurers provide your benefit and give you potential returns, they can link it to their investment activity in the form of Investment-Linked Insurance Products (ILPs).
Single and regular-premium ILPs provide you with a lump-sum payment in any covered event and upon your retirement.
CPF retirement accounts guarantee you’ll get income upon retirement. Using your CPF investible savings with annuities, you get a guaranteed payment stream that supplements your CPF retirement payments, possibly doubling your income.
Annuities have an accumulation phase, which collects payments to fund the annuity and an annuitization phase that pays the investor a guaranteed amount.
Having an endowment life insurance gives you two things in one: a guaranteed, risk-free return on a fixed date and life insurance with enough coverage. Endowment policies pay you a guaranteed income stream depending on the total amount you deposited. For CPF members, saving a sizeable portion on endowment policies is a low-risk move. However, you’ll need to supply a huge amount to ensure you get excellent returns.
Singapore Government Bonds (SGB)
Government debt issuance has a very small risk, and it helps Singapore’s government provide its public services. The country’s economy can survive virtually any situation, giving it the best bond yields available to any wise investor.
Aside from SGB, government-issued treasury bills are excellent CPF savings investment options. These are 100% Singapore government-backed bills that earn value the same way as SGB does.
The money you provide will help build Singapore’s infrastructure, fund its public spending and other government activities.
However, unlike SGB, it has a short-term position, providing investors with a 1-year maturity date at the longest and 6 months at the shortest.
Unlike US Treasury Bills, Singapore’s T-Bills are issued at a discounted face value upon purchase. The government will pay the guaranteed face value upon the appointed maturity date.
In the stock market, you can use your investible savings on individual stocks and bonds. The stock market categorizes companies according to their performance and industry, which we call indexes.
An exchange-traded fund (ETF) follows these indexes and pools money from investors. Their fund managers will invest in each company’s stock. Buying ETFs is an excellent decision if you do your research because they have lower expense ratios and broker commissions.
Fund Management Accounts
Typical bank savings accounts (including CPF) guarantee ample interest rates that ensure your money has the same value it had the first time you invested it. You can think of fund management accounts (FMA) as operating similarly.
Their major differences with savings accounts are their not bank-issued investment funds, and brokerages typically offer them. Plus, FMA can take on a slightly higher risk to achieve potentially better returns without huge losses.
FMA might operate like any traditional savings account or even your CPF. Its major likeness with savings accounts is its liquidity because you can withdraw your investible savings and its interest at any time you need it.
Having explained fund management accounts, you can think of fixed deposits as the bank’s alternative to FMAs. These operate in the same manner by providing the savings account a higher interest rate than the regular ones.
However, they are less liquid than FMAs because you can only withdraw your investible savings and interest 10 years after your deposit.
Singapore’s government links CPF to corporate statutory bonds. Statutory or surety bonds tie their value to corporations with obligations to fulfill their contracts with their suppliers. These bonds gain interest until they reach maturity.
Riding on statutory bonds offers the least amount of risk possible, nearly the same level as Singapore government bonds.
Guaranteed bonds use third parties to pay for an issuer’s bonds if the latter fails to pay for them. You can imagine how high-interest rates can get because of the risks you take buying guaranteed bonds.
Plus, your profits are always guaranteed with government-guaranteed bonds, with the Singapore government acting as the third-party guarantor to an issuer’s bonds.
These are your standard company shares with a minimum purchasing amount. You can use up to 35% of your CPF savings investing in shares.
These are funds that purchase commercial properties, including factories, offices, warehouses, and other retail spaces, directly bought by the fund managers or shares bought from property companies. CPF OA and SA owners can only use 35% of their investible savings.
If you want to grow your money with great interest rates, lend it to a company seeking to expand and grow their business through corporate bonds. As with all bonds in this list, it has a definite maturity date and is issued in blocks. You can invest 35% of your CPF savings here.
Any ETF, share, bond, or products that tie their value to the increase or decrease of gold is a gold-linked financial product. However, gold’s value is volatile since many countries broke off gold-treasury ties. You can only invest 10% of your CPF savings on gold and other gold-linked products.
Potential Returns You Can Get From CPFIS
Both CPF OA and SA have excellent interest rates. Therefore, taking out a certain amount for reinvestment is a risky move. Your target is to get an interest rate above your default savings account. While CPF terms have special brokerage charges (namely lower than market prices), it doesn’t guarantee you’ll have higher or lower profits because of any market’s nature.
Therefore, make sure to do your research regarding each investment vehicle available with CPFIS. Conservative products, such as bonds and fixed deposits, can help preserve your money’s value. High-risk products, including ETFs, shares, and corporate bonds, can increase your cash’s value, with a few caveats.
CPFIS Step-By-Step Investing Guide
Here are all the steps involved in making your very first CPFIS investment
- Meet all the eligibility CPFIS needs plus any additional requirements
- Open a CPF Investment Bank Account. CPF partners with UOB, POSB, OCBC, and DBS. Choose the one with the most convenient application option.
- Choose between using a financial adviser or investing on your own. Remember that each one has risks involved. For example, FAs can find ways to charge you higher or purchase expensive assets that can risk your portfolio. On the other hand, doing your research takes time, but you’re making your own investment decisions.
Be Aware Of Investment Risks
Investing in your CPF is wise because you can grow money beyond the nominal 2.5% OA and 4% SA interest rates available. However, make sure to take CPFIS’ SAQ modules seriously because they will teach you about investment basics.
Plus, embrace the fact that you might make losses and lower your CPF savings value, especially if you’re investing individually without an FA. Making money through value-linking requires inspecting company foundations and ties. The more time you take action due to research, the better you inform yourself about possible investment risks.
Before investing, always assess your risk appetite. You can take an online test to learn about your risk appetite.
Lastly, invest in a long-term plan. Many CPFIS products take around 5-10 years until they reach their maturity rate. Investing, including CPF investing, is a long-term commitment.
A Loan is a Great Alternative to CPF Savings
If you want to leave your CPF savings untouched while growing thanks to its nominal interest rates, you can use other means to finance your new investment venture. You can take out a personal loan through a bank or use Instant Loan to get up to three high-quality quotes from Singapore’s registered finance institutions.