How to increase your CPF interest rate?

We know that the interest rate has been rising and the Singapore Government Securities (SGS) bond yields have also been rising.

This got us thinking if we could maximize the current high interest rates. 

Here, we present a ‘hack’ you can use to increase your CPF interest from 2.5% to 3.2% without additional risk.

Singapore government bonds are now at 3.2% across the board

At the point of writing, bond yields are around 3.2%. This is consistent across the bonds – from two-year bond, five-year bond, 10-year bond, or even the 30-year bond! Even the Treasury Bills which have shorter maturities of up to 1 year are offering 3.2%. 

No matter which tenure you choose, the yield is about 3.2%. The yield curve has flattened. 

How you can use this to your advantage?

While bond yields have gone up, the CPF interest rate has not been increased. Although this topic has been deliberated in the Parliament, the chance of seeing an increase is slim.

But, you can take things into your own hands and manufacture your own interest rate in your CPF OA by investing into the Singapore government bonds! 

Did you know that you can use your excess CPF OA funds to buy Singapore government bonds?

The advantage is that the guarantee is the same because like the CPF OA interest rates, these bonds are also being issued by the Singapore government. Hence, you will not be taking on additional risks, even though you’re increasing your interest rate. 

Why not use Singapore Savings Bonds (SSB) instead? 

Unfortunately, you cannot use your CPF OA funds to buy Singapore Savings Bonds. However, you can use your funds to buy the SGS bonds.

Of course, if you’re looking to deploy cash, the SSB may be a better choice because there isn’t an interest rate risk – it’ll always trade at its par value, and you can redeem it at its par value too. 

Will I lose out on the compounding effect in the long run if I shift my excess funds to SGS bonds?

Money invested in CPF enjoys a compounding effect – the interest you earn this year will become part of your principal next year and start generating more interest for you.

Whereas if you were to invest in the SGS bonds, you’ll be receiving a fixed rate -i.e. if the coupon rate is 3.2%, you’ll only get $32 for every $1,000 invested. 

Hence, you may be wondering if shifting your excess CPF funds to the SGS bonds would give you a higher return now, but lower overall return in future.

I did a quick calculation on the assumption that you were to invest $1,000 over 10 years:

Based on a capital of $1,000, over the span of 10 years, with the compounding effect of CPF’s 2.5% you would have collected about $280.08 in total.

Comparatively, if you had invested $1,000 in the SGS bonds at a coupon rate of 3.2%, you would receive a total of $320.

So, in this case despite the lack of the compounding effect, you’ll still earn more interest by investing in the SGS bond using your CPF OA. This is because the span of the tenure required to outperform the 3.2% with compounding is a lot longer than 10 years.

Although it looks lucrative, that’s not the full picture. You have to take the costs into consideration:

Cost of investing in SGS bonds using CPF OA

These are the fees when you invest in SGS bonds using your CPF OA:

• One-time Transaction fee: $2.50
• Recurring charges: $2 per counter per quarter

The good news is that these costs are fixed which means it doesn’t change regardless of how much capital you put in. 

However, to ensure that you’re actually beating the 2.5% CPF interest rate, you’ll need to take these fees into consideration. And only invest if you can cover the costs and still beat the original interest rate.

Fret not, I’ve done the calculations for you:

Cost to buy and hold SGS Bonds using CPFIS accounts

Tenure	Fixed Costs
6 months	$6.50
1 year	$10.50
2 year	$18.50
5 year	$42.50
10 year	$82.50

So, now that you know the cost. You would be wondering:

How much do you need to invest to cover the costs and beat CPF OA’s 2.5%?

The minimum you’ll need to invest in order to beat CPF OA’s interest rate, after taking fees into consideration, is $3,000.

Again, I’ve done the calculations so you don’t have to: 

Principal	$1,000	$2,000	$3,000
CPF OA	$280.08	$560.16	$840.24
SGS Bonds	$237.50	$557.50	$877.50

If you invest only $1,000 in SGS Bonds at 3.2%, you’ll receive $237.50 after 10 years. This would be lower than the CPF OA’s return of $280.08.

Of course, if you invest more than $3,000, you’ll enjoy greater returns because you would already have covered the fixed costs. 

But wait, there’s more. 

Should you use your CPF OA to invest in SGS Bonds?

On top of the fees, there are 4 considerations you must note before you jump in.

1) Only use excess CPF OA funds above $20,000

Remember, the first $20,000 in your CPF OA attracts 3.5% interest! 

There is an additional 1% for the first $20,000 in your CPF OA and at 3.5%, that is still higher than what the SGS bonds offer currently.

So, keep your first $20,000 in your CPF OA!

2) Don’t invest all your excess CPF OA funds

Don’t go all in. 

This depends on how you view the interest rate environment. But my view is that the interest rates could go up even further.

Singapore doesn’t set our interest rates, instead we set exchange rates. Hence, it is very likely that we inherit the interest rate increase from the US. At the point of writing, US interest rates are still climbing, we might see a 3.5% yield from the SGS bonds in a couple of months. 

It’s safer to keep some capital now so that you don’t miss out on a better opportunity down the road. If you have the capital, you could buy a small tranche now, and as the rates go up, you can lock in a higher interest rate too. 

3) Don’t invest if you need liquidity

Unlike the SSB, SGS bonds could trade below their par value if interest rates fluctuate in the future. 

So, if you need your CPF OA funds to pay for education or a house in the near future, you shouldn’t be buying the SGS bond. Depending on the interest rate environment, you may not be able to redeem the bond at a good price. 

The best way to execute this strategy for higher rates is to be prepared to hold the SGS bond till maturity. 

Now, some readers may be thinking of using their CPF special account fund. Don’t. Here’s why:

4) Don’t use your CPF SA funds

Your CPF Special Account (CPF SA) offers a 4% interest rate. So, it doesn’t make sense to invest in SGS bonds now, unless their yields go way above 4%.

How to increase your CPF interest rate from 2.5% to 3.2%?

Okay, so you’ve decided that this strategy is worthwhile for you. What’s next?

First up…

This works best as a “buy and hold” strategy

Bond prices will fluctuate according to the interest rate environment. 

Hence, the best way to increase your CPF Interest rate with SGS bonds is to bid for them during the auction period and hold them till maturity. That way, you’ll be getting the higher interest rate throughout the tenure of the bond. 

Warning: Why you shouldn’t buy the SGS bonds from the secondary market?

SGS bonds are traded like stocks in the market. However, it is not advisable to buy and sell them in the secondary market. 

If it goes up, it’s fine because you can make some capital gain out of it. But if it goes down, you would incur some losses. And this is on top of the transaction cost of trading the bond – you’ll need to pay the regular brokerage fees. 

To add to the matters, if the trading volume is low, the spread of your bond price could be quite wide, leading to even more losses. 

Now that we’ve got that out of the way, which SGS bond should you buy? 

Since each of our financial situation is different, I wanted to share some considerations when it comes to choosing the best tenure for your own:

How to decide the best SGS bond tenure to grow your CPF OA funds?

As mentioned above, you have a range of treasury bills and bonds with varying maturity tenures to choose from.

i) T-bills may not be worthwhile

Treasury bills (aka t-bills) have a maturity of 6 month to 1 year. Unless you expect interest rates to start dipping in the near future, these may be too short. 

The downside of investing in t-bills is that you may need to roll over to new bonds once they expire, in order to continue getting the higher interest. When you do so, you’ll incur another $2.50 transaction fee and the quarterly $2 fee.

Sounds like peanuts, but if you work out the sums, the rollover costs may be significant and you may not beat the 2.5% CPF interest rate. This is especially true if your capital is small. 

ii) 30-year bond may be too long 

This is especially true if you’re near the retirement age and you might need the funds for your retirement expenses. In such cases, you may be forced to sell below par value as well. 

So do plan ahead if you’re in such a situation. 

iii) 5 to 10 years may be suitable, depending on your perception of the interest rate environment

Nobody knows how the interest rate environment will play out because we don’t have a crystal ball. 

Interest rates could fall if inflation has been reigned in. Let’s say the yields fall back to 2% in the next five years or so. If you bought a 10-year bond at 3.2%, you’re actually locking in a higher rate over a longer period. 

On the flip side, interest rates may continue rising. Would you be okay with a 3.2% rate if the yields go up even higher? 

You should choose the best SGS bond tenure based on your own financial situation and goals. I’ll leave that to you. 

Once you’ve decided, here’s:

How to buy Singapore Government Securities (SGS) bonds using CPF OA? 

1) Find the latest SGS bonds that are open for application

You’ll find the list of SGS bonds on the Monetary Authority of Singapore’s (MAS) website.

There, you’ll find a similar looking list that tells you the release date, auction dates, tenures, status and more details of available SGS bonds.

At the point of writing, the only SG Treasury Bond available now is the 30-year bond. There would likely be more offerings in the coming months. However, there are two Treasury Bills available – 6 month (~3.19%) and 1 year (3.15%).

Based on the previous frequency, you can expect new 1-year treasury bills every quarter and new 6-month treasury bills issued twice a month.

2) Make sure you have a CPFIS account

To buy SGS bonds with your CPF OA, you’ll need a CPFIS account. Your SGS bonds will be custodised under your CPFIS account.

You can learn how to go about opening your CPFIS account and CPF investing here.

3) Make a trip to the bank

Unfortunately, applying for SGS bonds with your CPF OA isn’t as straightforward as logging into your brokerage account, unlike when you’re using cash. 

You’ll need to visit the banks’ branches personally in order to apply for it. And only the three three banks, DBS, OCBC and UOB are dealers for the CPFIS scheme. 

tl;dr

We know that CPF OA rates have not increased despite the rising interest rate environment. However, we also know that SGS bond yields have gone up and are at about 3.2% at the point of writing. 

Since the guarantee is the same, you can unlock a higher interest rate in your CPF OA by investing your excess funds (above $20,000) in SGS bonds, without taking on additional risks. 

I do think that conservative investors can consider increasing their CPF interest rates from 2.5% to 3.2% using this method. That said, it might not be for everyone. I’ve shared key considerations you must take before deciding if this strategy is for you, and how to choose the best SGS bonds to invest with your CPF OA funds.