Many Singaporeans use their CPF primarily to finance the buying of a property, since most believe that owning a home is still one of the best assets to have. For those that may not qualify for eligibility to buy a HDB but still want to invest with their money, there’s always the CPF Investment Scheme(CPFIS).
What is the CPFIS?
The CPFIS is a scheme that gives CPF members an option to use some of their CPF money for investments. There are many types of investment choices available to suit various risk appetite and investment objectives.
You can only invest any amount in excess of $20,000 in your Ordinary Account(OA) and in excess of $40,000 in your Special Account(SA). In addition, you can only invest your OA savings up to 35% and 10% of your investible savings* in stock and gold respectively, also known as the stock and gold limits.
Some of the investment products you can invest under the CPFIS scheme include Unit Trusts, Investment-linked Products, annuities, endowment policies, Singapore government bonds, treasury bills, Exchange-traded funds and fund-management accounts.
If you want to invest money from your OA, you’d need to open a CPF Investment Account with DBS, OCBC or UOB.
If you were hoping of withdrawing the profits from your investments out of your CPF account, you might be disappointed to know that you can’t. Since the point of the scheme is to help build up your retirement nest, any profit will be deposited back into your CPF account.
While there are benefits to using CPFIS to invest, the returns on investments are never fully-guaranteed (like every type of investment), so prudence and research are required. Since your CPF money can be used for other purposes as well, you should consider the following factors before investing your money.
Who Shouldn’t Invest
1. You anticipate the need of your CPF money in the short term
Some reasons that you may not want to use the CPF money for investment include planning to buy a property in the near future or using the funds for your child’s education. However, if you don’t want to use all your CPF for your property financing, you might want to consider investing a portion of your funds so that the money is not locked up in your property.
2. Nearing retirement age
Investments need time to grow and it is unwise to start investing only when it is near your retirement. Our investment goals typically change with our life cycles. For example, when you are younger and have no huge financial commitment, you can afford to take up a more risky investment. For those who are looking to build up their retirement nest egg, you’d typically invest in more fixed-income investments to reduce volatility and possible losses.
This is why you should think twice about investing your CPF money nearing your retirement. As well, the money from your OA and SA will be transferred to your Retirement Account on your 55th birthday. CPF members aged 55 and above will earn an additional 1% extra interest on the first $30,000 of their combined balances (with up to $20,000 from the OA). As a result, CPF members aged 55 and above will earn up to 6% interest per year on their retirement balances. This means that you need to weigh the risk-return rate on your investments to see if they can return as much as what your CPF account interest can provide you.
3. You have no idea about investments
There are some clients who feel that they are missing out on making potential profits if they do not use their CPF money for investments. These are also the clients who do not know much about investments. If you have a fear of making losses and can’t take much risk, you may want to think twice about investing with your CPF money since it is used to build up your retirement fund.
Otherwise, your financial planner can also advise you on some “safer” investment products, although your returns may not beat the interests payout from your CPF. We can also provide an assessment for you if you need help.
How To Choose The Investment Products Best Suited To You
Start by asking yourself what your investment objective is. Are you looking for growth and can take a higher risk, or are you looking for safer returns to provide a stable yield for the long term?
You may also want to have a look at your overall financial well-being and plans. If you are currently servicing your mortgage loans with your CPF and is considering to be a stay-at-home mum, you may not want to use your CPF money for investments since you will stop receiving CPF payments.
Similar to investing in other markets, you might want to take up a portfolio approach when investing your CPF funds.
A portfolio approach to investments mean you diversify your risk by buying a few different types of investments to balance your overall portfolio. In case when one investment sinks in a particular year, the others will do better to balance our your overall returns. This approach is best summarised by the anecdotal wisdom “do not put all your eggs in one basket”. Diversification allows investors to spread some of the downside risk associated with any one investment position without necessarily decreasing the expected rate of return.
Want to learn more about how you can maximise your CPF money? Book an appointment with us to find out more!