Transfer now from OA to SA, you will earn additional interest of:

[gonzales]

Hi Folks,
We have received a letter from CPF for the annual statement odf account.
In the letter they have highlighted the option to transfer funds from OA to SA, highlighting that OA currently offers 2.5% interest & SA offers 4% interest. This is quite attractive but I wanted to open a discussion on the drawbacks/risks of doing this.

1st one is that it is irreversible.

anyone else got some feelings either positive or negative on this option?

Many thanks,
G.

[sundaymorningstaple]

No, it's not reversable, but they will pay an extra one percent across all the accounts for the first 60K of CPF. If you transfer a sizeable amount, and then want to use your OA for a home purchase, you will be out of luck getting that money back into the OA for say the downpayment. Be careful, but be advised it's still the best investment out there on a risk on risk analysis.

[JR8]

vs the Straits Times Index yielding 4.3% + any capital gain?

[BBCWatcher]

vs the Straits Times Index yielding 4.3% + any capital gain?

Less trading and depository costs which are considerable.

I agree with SMS. It's extremely hard if not impossible to find anything as safe as CPF's Ordinary, Special, Medisave, and Retirement accounts that is also anywhere near as high yielding. This is a AAA rated government, a government guaranteed account, and with Singapore tax advantages too. And CPF's yields are actually above 4% because 5% yields are paid on base amounts (6% for those over 55). So everybody gets something above 4% on their Special, Medisave, and Retirement Accounts. Also, that's the minimum yield. If inflation ever picks up enough in the future, the nominal CPF yields will automatically increase.

It's really a fantastic deal.

[JR8]

Your costs to do a trade, S$10-20

Considerable vs having your future gerrymanded?

[BBCWatcher]

Please elaborate. And by the way, "Who cares?" CPF contributions either are or they are not. There aren't many choices here. Objectively it's a great deal, but citizens and PRs don't get a choice whether to take that great deal or not.

[PNGMK]

One thing I would suggest you factor in as a risk factor is losing your job and having a mortgage. With funds in my OA I can manage 100% of my mortage for a year or so - if I moved the OA funds into the SA I would be out of luck for that scenario.

[curiousgeorge]

Please elaborate. And by the way, "Who cares?" CPF contributions either are or they are not. There aren't many choices here. Objectively it's a great deal, but citizens and PRs don't get a choice whether to take that great deal or not.

Well, yes and no.

Yes in that CPF contributions are mandatory, over which SGn/PRs have no choice.

But no, in that once you have $20k in your OA and $40k in your SA you have a variety of investment channels through the CPF Investment Scheme.

You can use anything over $40k from your SA to invest in various bonds, T-bills, ILPs and UTs.
You can use up to 35% of your OA funds (after the reserved $20k) to invest in pretty much anything on the SGX, property funds and corporate bonds. And up to 10% of your OA in gold.

So for most lazy/risk averse people, the AAA rating of SG Govt PLC offering 4/5/6% in the SA/RA will be the easiest and lowest-risk deal.

But the likes of JR8 can go ahead and make that extra 0.3% on the STI

As PNGMK pointed out, for many people the OA is a mortgage saving/payment vehicle and they can't afford to transfer to the SA.

On the other hand, any PR who wants the low risk returns but has no intention of retiring here (i.e. will withdraw all of their CPF in the future) and doesn't buy property, shift as much as you can into the SA.

[JR8]

But the likes of JR8 can go ahead and make that extra 0.3% on the STI

Not for me thanks, I wouldn't want that 'concentration risk'. I was just highlighting that from the figures given you'd earn a higher dividend return on the STI than CPF, and that's before you did any sifting to pick stocks you like that might yield/return you more.

A common performance measure is return vs the index. Obviously a tracker tends to be neutral, if well constructed and dynamic, so that is what is considered a baseline requiring minimal work and costs to achieve*. A fund manager of note or repute should be adding to that baseline, perhaps materially. It surprises me to see that Temasek returns less than the index yield, esp given the way it seems to be heralded as something bordering on the divine.

p.s. There was reference earlier to depository fees. Can't say I've ever paid then. Perhaps they are something SGn...


* Example: You can buy a blue-chip FTSE-100 tracker with an annual fee as low as 0.1-.3%/pa

[BBCWatcher]

If you want to chase the STI then do so, but I don't recommend you do that from CPF. It'd be much better to do that, if you do that, outside CPF. SRS accounts work much better for that purpose, for example. I'm of course assuming that at least your planned savings consists of more than CPF.

The logic here is that practically everybody who saves ought to have a diversified portfolio that includes both safe assets and some potentially higher yielding but riskier assets. (At higher wealth levels you can reasonably assume a bit more portfolio risk.) CPF's normal yields are both safe and very, very good. You really want to max out those particular safe assets. Then take other dollars, via an SRS account for example for some Singapore tax benefits, to allocate funds into the riskier side of your portfolio. Those dollars outside your CPF account couldn't possibly find safe 4%+ assets, so you want to spend those dollars, not your already hardworking safe CPF dollars, on anything you're doing that's riskier.

Make sense?

One footnote: special considerations apply to U.S. citizens and U.S. residents.

[JR8]

I'm of course assuming that at least your planned savings consists of more than CPF.

I don't have anything in CPF, never have. And I've always considered any supposed rights to future income streams resulting from compulsory contributions from employment income to [any] government schemes to be zero; at least until any future time I become entitled to draw on it and money physically begins arriving in my bank account. Given a governments unlimited power to 'tinker' with such schemes I'm not sure it's wise to assume anything else.

'If you want to chase the STI then do so'. I have nothing invested in the STI, nothing in Singapore. The point was a funds performance is usually benchmarked relative to the index in which it is invested. I'm rather surprised you aren't pondering why your return is less than a plain-vanilla index-tracker would yield. But if your contributions are compulsory, perhaps any such pondering might simply be wasted time.

[BBCWatcher]

Fundamentally you have rather odd assessments of risk when it comes to savings vehicles. That's fine. You're allowed to be as odd you as you like unless you're a citizen or PR with earned income in Singapore. Then the government requires CPF contributions.

[JR8]

Really? And there was me thinking I understood the principles of financial risk management pretty well. Not least because such risk calculation and reporting was a daily part of my job for 15 years. But hey, there we go

Do the CPF publish accounts? It would be interesting to see how they manage to achieve sub-index returns.

[BBCWatcher]

It's entirely predictable that most financial experts -- well, the ones who don't have incentives to provide anything but sound financial advice in the best interests of their clients -- would agree that a AAA rated government offering an inflation-adjusted 4%+ with zero tax and in a low inflation environment is offering a fantastic deal. They would only quibble with how much of that safe investment you should hold depending on your age and other factors, but they wouldn't quibble with the fact it's much safer than your hypothetical STI index fund. You should receive a higher yield for riskier assets, otherwise why hold them?

And there is risk in an STI index fund, a lot of it! We've had the Asian Financial Crisis, SARS, and, for comparison, if you had invested in a Nikkei 225 index fund on December 29, 1989, and sold today, then you would have roughly a 59% capital loss, assuming a zero cost index fund that doesn't actually exist. (And some dividends along the way to claw back some of that loss/fund cost, but not much.) That's an index fund with 225 equities instead of 30 (STI) in a much bigger economy, so it's a much more diversified fund. But if you held Japanese government debt, you did extremely well in comparison.

As another point of comparison, we do know what the yield is on the safest assets available in Singapore because that's what the yields are on AAA rated Singapore Government Securities. The 10 year SGS is fetching about 2% give or take, and that's without CPF's tax advantage. In other words, in a competitive investment market, an STI index fund must pay more than double the yield of the safest asset offered in the same economy in order to compensate investors for the added risk.

There is really no serious question that CPF's 4+% both-sides-tax-free yield is a fantastic deal for comparatively safe assets -- and they are very similar to SGSes in their risk profile in any reasonable assessment. But if you have a much higher risk tolerance than the broad investment community, no problem! You can gamble on an STI index fund if you wish. Or invest in real estate (directly or indirectly), or whatever.

[JR8]

Re: 'Zero tax'
'Temasek contributes to the Singapore Government budget via the dividends it pays to its shareholder and the tax on its profits.'

Re: acceptance of risk
'Ho joined Temasek Holdings as a Director in January 2002 and became its Executive Director in May 2002.[8] The then-chairman of Temasek Holdings, former Cabinet minister S. Dhanabalan, said Ho was the best person for the job because of "a willingness on her part to take calculated risks[9]"
https://en.wikipedia.org/wiki/Ho_Ching

Re: 'safer than an STI index fund'. How does the volatility of returns look to you? Gyrating between the most hair-shirt of T-Bills to the soon-to-implode junkiest of junk-bonds? Wonder if 'gambling' on the STI would provide a wilder ride than...
'2015 - Total Shareholder Return (one year return) 19.2%
2014 -Total Shareholder Return (one year return) 1.5%
2013 -Total Shareholder Return (one year return) 8.9%
2012 -Total Shareholder Return (one year return) 1.5%
2011 -Total Shareholder Return (one year return) 4.6%
2010 -Total Shareholder Return (one year return) 42%'
https://en.wikipedia.org/wiki/Temasek_Holdings

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