By Cai Haoxiang
RECENTLY, the media has highlighted the Central Provident Fund (CPF) as a way to build up one's savings. Financial bloggers, too, emphasise the CPF's importance from time to time.
One idea out there is how one can transfer one's monies from the Ordinary Account (OA), meant for housing typically, into the Special Account (SA), which pays a higher interest and is meant for retirement.
The transfer is irreversible. But once transferred, one can enjoy the 4 per cent risk-free annual yield on the SA which is better than anything else out there.
Transfer early enough and you might even be able to build up a S$1 million pot in your retirement account by the time you retire in your 60s.
The million-dollar figure can be hit assuming you keep working and contributing to the account, and do not overpay for a property.
At age 55, some money will be taken out from the SA to form the Full Retirement Sum needed to purchase the CPF Life annuity at age 65.
The remaining money sits in the SA. The account becomes a high-yielding "bank account" that one can withdraw living expenses from anytime.
All this sounds good in theory.
But upon reflection, I realised I should not transfer my OA to the SA. Nor should most people do it.
The opportunity cost of locking a source of liquidity up in the SA in my younger days is too much, compared to what I can do with the money.
The benefits, meanwhile, are limited, if I don't give a very long time for the SA to compound way into my 70s or 80s.
The key problem is I will miss out on the chance to use my OA savings for property purchases.
Some might say OA monies should be left untouched to accumulate at 2.5 per cent a year, while cash, currently yielding nothing, should be used instead for property.
But they are thinking only in terms of current economic conditions.
It is not worthwhile to use OA monies to buy property now because we are stuck in a down-cycle. Cooling measures are unlikely to be lifted anytime soon. Rental yields are low. Prices are still relatively high compared to incomes.
It might make sense to leave money in the higher-yielding OA now, when bank accounts yield nothing.
Yet in a true property market downturn, I will be able to buy undervalued properties that have the potential to appreciate far more than 2.5 per cent a year.
If that situation ever strikes Singapore, I want to marshal all the resources at my disposal to make a big buy.
Meanwhile, what is the opportunity cost of not transferring money to the SA and leaving it in the OA?
I will miss out on some interest, sure. But I won't miss out on much in the short run.
The SA pays 4 per cent a year, while the OA pays 2.5 per cent.
Say I have S$100,000 in the OA that I could transfer over.
If I don't transfer, I will miss out on 1.5 percentage points worth of interest on that S$100,000, which is around S$1,500 a year. Due to compounding, this figure will rise every year.
But I'm willing to pay a price to have the flexibility to make a bigger property purchase. The 2.5 per cent a year that I get on my OA monies is still not a small sum. In fact, it is higher than the yield on 10-year Singapore bonds right now.
Because I want the flexibility to use my OA as I please, and because the SA does not yield significantly more than the OA, I'll pass on transferring the OA to the SA.
Thus I don't need to be beholden to the idea of accumulating S$1 million in the CPF. Money is a fungible concept across asset classes and pension monies.
The catch is that I am forgoing safe returns in exchange for a bet on the property market.
Yet because I intend to stay in the property I buy, I will derive intangible benefits beyond the value of the asset.
A better way
In the meantime, I can still build up my SA monies through other means.
The easiest way is to contribute new cash into the SA. It makes sense if there are no better-yielding instruments out there at acceptable risk levels.
Provided one has not hit the Full Retirement Sum (FRS) limit in the SA, one can get an equivalent amount of tax relief by contributing up to S$7,000 a year into one's SA under the Retirement Sum Topping-up Scheme. Tax reliefs are capped at S$7,000 a year.
The cash top-up method of building up the SA allows one to build up SA monies slowly, such that one can enjoy tax savings for many years to come. You won't be able to top up once you hit the FRS cap in the SA.
Thus by hitting the FRS on the SA later and using this method, there are several advantages.
First, you are deploying cash yielding nothing into an account yielding something. The interest rate differential is a lot more significant than what you get by shifting the OA to the SA.
Second, you get tax savings.
Third, by hitting the FRS cap later, you can continue deploying fresh cash to reap those tax savings.
Everybody's circumstances vary. I did the sums for myself, comparing my end result if I were to transfer a substantial sum from the OA to the SA versus leaving it there. In both cases, I continue contributing S$7,000 to the SA every year until I couldn't due to limits hit.
I take into account how in the transfer scenario, I will not be able to contribute S$7,000 after a few years, because I will have hit the FRS cap on my SA.
I also take note that the Medisave Account overflows into the SA once the Basic Healthcare Sum of S$50,000 is hit, and overflows into the OA once the FRS is hit.
I also assume I use my OA to pay a 20 per cent downpayment of a typical resale five-room flat several years down the road.
As it turns out, transferring OA to the SA now, only gives me a S$3,000 boost to combined OA and SA savings at age 55, compared to not doing it and topping up the SA with cash instead. If I account for tax savings, I might even be better off not transferring at all.
It was a surprising result. But it happened because I had to wipe out my OA to pay for the flat in the scenario where I transferred OA monies to the SA.
But I didn't have to do so for the scenario where I didn't do the transfer. The extra OA money I already had was able to snowball over time in a way that negates the extra gains to the SA from transferring money into the account early.
Those extra gains simply weren't big enough, perhaps because I did the transfer in my 30s instead of my 20s, and because my time horizon was only till age 55.
Meanwhile, extra Medisave monies piled into the OA, adding to the snowball effect.
To sum up, I don't think transferring money from the OA to the SA is for most people, unless they are wealthy property-owning youths with cash to spare.
Given how high property prices are in Singapore, and how important property ownership is to the Asian psyche, most people should stock up on dry powder in the OA to deploy to property when the time is right.
But to be clear, leaving money in the OA is the riskier choice, because there is a chance that you can overpay for a property.
Yet transferring OA monies into the SA might not yield as much benefit as people think.
Ultimately, to hit a S$1 million retirement sum without having to start a business, one still has to stay employed for as long as possible, and to be prudent in one's property purchases.
The money that can then accumulate in the CPF will far outweigh whatever you end up transferring into it.