Last Saturday, there was a protest against the Central Provident Fund (CPF) system, drawing almost 3,000 people at Hong Lim Park. During the protest, the speakers demanded amongst many things, a better CPF interest payout, the allowance to draw out their CPF savings at 55 years old and to be able to opt out of CPF Life. The protest highlighted certain misconceptions on the CPF System which I find worrying for fellow Singaporeans. Obviously most Singaporeans don’t understand how to manage their monies.
Higher returns, higher risks
According to the CPF website, an additional 1% interest will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). The additional interest received on the OA will go into the member’s Special Account or Retirement Account to enhance his retirement savings.
If a member is above 55 years old and participates in the CPF LIFE scheme, the additional 1% interest will still be earned on his combined balances, which includes the savings used for CPF LIFE. Savings in the Special and Medisave Account (SMA) currently earn either 4% or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher.
The interest rate on SMA savings is adjusted quarterly, based on interest rates on 10YSGS over a preceding 12-month period. The average yield of the 10YSGS plus 1% from 1 March 2013 to 28 February 2014, works out to be 3.19%. Accordingly, the SMA interest rate payable to CPF members from 1 April 2014 to 30 June 2014 will be maintained at the current floor of 4%.
Detractors of the CPF Scheme failed to realize that the golden rule in the world of investment is that to expect higher returns from your investments, you must bear higher risks. Singaporeans don’t realize that putting their money in the banks is also a form of investment. Because when you deposit your monies in the banks, you expect a certain amount of interest payouts. The banks, in turn, would use your monies to invest in instruments that can help them make money. Currently, the local banks’ interest rates are 0.21%, less than 10% of CPF guaranteed 2.5%.
Now, if you ask, which financial institution gives you this sort of interest payout, assuming you are able to draw out your CPF monies? And how many companies are willing to guaranteed returns of 2.5% per annum for any of their financial products? By taking out your CPF savings and putting them in the banks, you are in fact, making huge losses because of the pathetic bank saving interests. In good times, Singaporeans demand high interest payouts for their CPF savings, but is it fair to demand such interest payouts during economic crises? Sometimes, Singaporeans need to understand that you cannot have your cake and eat it.
Why you should not touch your CPF Savings
Remember the Malaysian Indian cleaner who was killed at Changi Budget Terminal due to a freak accident last year? Kind-hearted Singaporeans donated S$1 million to his family, hoping that they can cope financially with the loss of their sole breadwinner. Last week, I read from a local Chinese newspaper that the family had squandered away all the monies and ended up homeless within a year. When I come across such article, I am not surprised at all. Human beings, in generally, cannot handle financial windfalls because of our human nature to spend.
Most people don’t have the financial will and discipline to manage windfalls. I have read many articles of Americans ended up as bankrupts after winning hundred of millions of jackpots. Most squandered away the monies within 5 years. My colleague also told me that in the nineties, there was ever a murder case related to money dispute after the family member got to know that the winner won the lottery. The same goes to our CPF monies.
There have been far too many reported cases of senior Singaporeans squandering their CPF savings on mistresses after collecting their CPF monies. Most Singaporeans really cannot handle it when given a big sum of money and thus, ended up spending away all the monies. This is the hard truth most Singaporeans stubbornly refused to accept. Most Singaporeans claimed that they want the right to manage their CPF monies but the reality is, most Singaporeans are really incompetent to do so. By not releasing the CPF monies to you, the government is actually protecting you.
SG Wealth Builder