Should you put your CPF Ordinary Account monies into Special Account?

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There are various means to make more money, like investing your savings. And if you’ve been looking at ways to grow your nest egg, you may have learnt that some people do so by transferring the monies from their Ordinary Account (OA) to their Special Account (SA) because the latter offers a higher interest rate.

But while it seems like a “safe” thing to do, you need to know the pros and cons of making an investment like that. Depending on your needs, the advantages might be disadvantageous to you in other ways. Read on to find out more.

The pros of putting your savings into your Special Account

First things first: CPF schemes help working Singaporeans with major costs of living, namely housing (the money of which comes from OA), retirement (the money of which comes from SA) and healthcare expenses (the money of which comes from Medisave Account).

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When you turn 55, the SA monies are transferred to your Retirement Account, and once you have achieved the Full Retirement Sum, you have the option to start withdrawing money from the account.

Because the purpose of the SA is for you to save for your retirement, it offers at least four per cent interest per annum (at least till Dec 31, 2020 and the rate is subject to change). This is a higher interest rate than that of which is offered by many other financial products out there, and is free of risk.

And while the first $40,000 in your SA cannot be used for investment, you can gain five per cent interest per annum by simply keeping the money in the account.

The cons of transferring Ordinary Account monies to Special Account

The higher interest rate is attractive, but there are a few things to consider to find out if this investment is for you. For one, unless you have sums of cash elsewhere, you probably shouldn’t make the transfer if you plan to buy a house.

“If you transfer OA monies to SA, the move is irreversible. This applies to both the sum and returns, so one has to consider if they need to use their OA for other things like property loan payment or tertiary education fees,” says financial consultant Adelina Koh.

In short, while putting money into your SA earns you more interest in the long run, it reduces your cash liquidity. And because you can’t access the money in your SA before the age of 55 (subject to CPF rules), you can only use the money left in your OA in the event of an emergency.

Investing with Ordinary Account vs investing with Special Account

According to the CPF website, interest rates for both OA and SA are reviewed quarterly. The OA earns  the legislated minimum interest of two-and-a-half per cent per annum, while the SA earns the current floor interest rate of four per cent per annum. 

The government also tops up an additional one percent for the first $60,000 of combined CPF balances (which is capped at $20,000 in the OA) for those below the age of 55.

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Before making any investment, whether it’s using CPF monies or cash, it’s important that you consider carefully factors such as your risk tolerance, investment time horizon (how much time you have to fully optimise the investment), and your overall financial situation.

Apart from the difference in interest rates between both accounts, the difference in risk level through diversification is the reason why some may favour investing with the SA.

“CPF SA-approved products tend to have lower risk compared to CPF OA-approved products. For example, the unit trusts will not be 100 per cent equity based, but between 30 to 40 per cent equity, and the rest in bonds,” explains Adelina.

When to invest with your Special Account

If you don’t foresee yourself using your OA funds for any sort of payment, transferring the money to your SA is a good option to build your retirement fund. Plus, if you invest young, there is a long time horizon for the interest to compound.

But if you use your SA for investment, be prepared to lose the risk-free interest you would otherwise be getting from CPF, and make sure to do your homework prior.

“To optimise SA investments, both time and timing in the market is important. An advantage of investing during recession versus boom times will be the lower market pricing.”

This article was first published in Cleo Singapore.