In Singapore, the Central Provident Fund (CPF) acts as the country’s pension scheme to enable working Singapore Citizens and Permanent Residents to save for retirement.
The scheme, which lets employees save-as-they-earn, also addresses healthcare, home ownership, family protection and asset enhancement, and comes with guaranteed annual returns.
However, only one-in-five Singapore investors are confident that the CPF system will meet their retirement needs, according to findings by a 2015 Manulife survey.
As such, many Singaporeans have tried to invest their CPF money. But here’s why doing so might not be a good idea.
In 2015, 40% of Singaporeans who invested their CPF money made losses
Under the CPF Investment Scheme (CPFIS), Singaporeans can invest in CPFIS-included funds such as approved unit trusts and equity funds.
This is also provided if you have at least S$20,000 in their Ordinary Account (OA) and S$40,000 in your Special Account (SA). With your CPF, you can invest up to a limit of 35% of investible savings for stocks and 10% for gold.
While the CPFIS is supposed to give financially-savvy Singaporeans a chance to beat their CPF returns, we all know by now that it doesn’t always work that way.
So why are CPF investors losing money?
Behavioural biases in investment, lack of financial literacy and high fees are just among the reasons for underperformance:
- Picking products that earn you less than your CPF returns
First things first – unlike money parked in your savings account, which gives you an average annual interest of 0.25%, CPF already gives you a healthy annual return, and these returns are guaranteed!
An additional 1% interest per annum is also currently paid on the first S$60,000 of a member’s combined balances (with up to $20,000 from OA). You can read more about CPF’s rate of returns here.
So while investments like stocks and unit trusts are commonly seen as vehicles that can earn you higher returns than your CPF, they also come with much higher risks and returns are not always positive, especially in this volatile economic climate.
The double-blow for investors who lose their CPF money in these investments is that, besides losing their initial investment, they would also have lost their otherwise guaranteed interest that comes with CPF.
- Buying financial products with high fees
Some of the investments approved by the CPFIS include financial products like unit trusts, which end to be more expensive because they have to be managed and hence, requires the expertise of a fund manager.
The tricky part is these additional charges may not be immediately obvious to the buyer. For instance, when you buy a fund, you will be charged a subscription fee or initial sales charge that can range from 1.5% to 5% of your investment, according to Moneysense.gov.sg.
An annual fee is also commonly charged by the fund manager for managing the fund, and charges could range from 0.5% to 2% per annum of the fund’s value. Other charges include an annual fee charged by the trustee for providing custodian services (usually around 0.1% to 0.15% p.a. of the fund’s value), and administration and audit fees.
However, the bright side with such investments is, you can invest with as little as S$1,000 and your fund is managed by experienced and professional fund managers.
- Having no patience and switching assets too often
Patience is virtue, and impatience can get costly if you’re an investor.
The thing is, many investment products in the market warrant a longer investment horizon. More conservative investors cite 15 to 20 years as the time horizon for long-term goals.
Over long-term time periods, stocks offer greater potential rewards. A longer investment horizon also allows for recoveries after a downturn.
For investors who get impatient and switch as soon as their investment dips, or keep switching based on recommendations of friends or agents, the result is, they will be forking out additional transaction costs on top of losing their initial investments. Typically, you pay about 1% of your investment when you switch from one fund to another fund managed by the same fund manager.
Not having enough in your CPF can affect housing and retirement plans
In order to encourage home-ownership among Singaporeans, CPF members are allowed to use money from their CPF Ordinary account to help with their mortgage repayment.
Statistics from the Ministry of National Development showed that more than 80% Build-To-Order homebuyers don’t pay any cash for their monthly mortgage repayment.
What this means is that the majority of these homeowners are able to pay for their mortgage repayment through their CPF OA contributions. Not having enough in your CPF means you’ll need to fork out for your mortgage repayment with cash, or it could even jeopardise your plans of owning a home.
Further, the CPF system was in the first place, created to assist Singaporeans with their retirement and healthcare needs. So, a dent in your CPF account as a result of making some wrong investment choices could sadly mean you might have trouble sustaining a comfortable retirement in the future.
Currently, the CPFIS is undergoing internal review and updates can be expected in the next 12 months, said Manpower Minister Lim Swee Say in October.
This followed Deputy Prime Minister Tharman Shanmugaratnam’s announcement that the scheme was “not fit for purpose” and was going to be reviewed.
Does this mean you should never invest with your CPF money?
Not quite. Because while there are disadvantages to investing with your CPF savings, there could be an upside to it as well, if you do it with proper knowledge and guidance. One way to do that is to seek qualified advice from a reputable wealth manager.
You also need to be patient and hold on to your investments, as you might not reap rewards in the short-term.
Alternatively, you can move your OA savings to your SA to build up your retirement savings. Doing so will give you a risk-free and guaranteed source of returns, which currently earns up to 5% per annum. This figure is adjusted quarterly.
However, to do that, you will need to be under 55-years-old and you should only do so if you do not intend to use your OA for housing. Also note that the transfer from OA to SA is irreversible once it is implemented, so think wisely!