You will be able to compare the three ways to pay for a T-bill and spot the hidden cost of using CPF savings.
Arjun has three possible sources of money for his next T-bill: cash in his savings account, a little in his SRS account, and a healthy balance in his CPF Ordinary Account. A friend tells him the CPF route is a free lunch, because "the T-bill pays more than CPF". It might. It might also leave him barely better off once he counts what the money stops earning. This lesson goes through all three routes and the cost each one hides.
Cash is the most common route. You apply through the internet banking or ATM of a local bank that handles Singapore Government Securities applications, and the money comes from your bank account. The bills are held in your own CDP account, the Central Depository account that also holds any SGX shares you own, so you need a CDP account linked to your bank account before you apply.
When the bill matures, the face value is paid into the bank account linked to your CDP account. Lesson 4.1, A T-bill pays its interest up front as a discount, covered how the payment and refund appear on your statement.
Cash has a hidden cost too, though usually a small one: whatever that money would otherwise have earned. Taken from a savings account paying very little, it costs almost nothing. Pulled out of a fixed deposit early, it costs you the penalty on that deposit, and that belongs in your sums.
If you have a Supplementary Retirement Scheme account, you can use its balance to buy T-bills. You apply through your SRS operator, the bank that runs your SRS account, and the bills sit inside SRS. When they mature, the money goes back into your SRS account.
That matters for planning. SRS money keeps the tax rules of the scheme, so you cannot treat a maturing T-bill bought with SRS as spending money. It is a way to earn a return on SRS cash that would otherwise sit idle. How SRS withdrawals are taxed is set out by IRAS, so check there before mixing SRS money into a plan for a near-term goal.
You can also buy T-bills with your CPF Ordinary Account savings, under the CPF Investment Scheme, CPFIS. You apply through one of the agent banks that run CPF investment accounts, and the bills are held in that CPF investment account. There are conditions on who can use CPFIS and how much of the OA can be invested, so check the current rules on the CPF Board website before you plan around it.
Two practical points catch people out. The application deadline for CPF funds at the bank is usually earlier than for cash, sometimes by several days, because the money has to move through CPF first. And when the bill matures, the proceeds go back into your CPF. They stay CPF money and cannot be spent outside the uses CPF allows. Ask your agent bank how long it takes for proceeds to return to your OA and any charges on the CPF investment account.
Money in your OA earns interest from CPF Board. Take it out to buy a T-bill and it stops earning that interest for as long as it is away. So the fair comparison is not the T-bill yield against zero. It is the T-bill yield against the OA rate.
Here is a made-up example, with an OA rate of 2.5% a year and S$20,000 of Arjun's OA money going into a 182-day bill.
If the cut-off yield is 3.0%, the bill earns about S$299 over the 182 days. Left in the OA, the same S$20,000 would have earned about S$249 over the same period. The difference is about S$50.
If the cut-off is 2.6%, the bill earns about S$259 and the OA would have earned about S$249. The difference shrinks to about S$10.
And the real gap is smaller than these figures, for three reasons. The money usually leaves the OA before the issue date and returns some days after maturity, and it earns nothing from CPF while it travels. CPF Board also pays extra interest on part of your balances, and moving money out of the OA can reduce what you get, so check how the extra interest works on the CPF website. Finally, any agent bank charges come straight off the gain. A few dollars on either side can wipe out a S$10 advantage altogether.
The CPF route works best when the T-bill yield is well above the OA rate. When the two are close, the effort and the timing gaps can leave you with nothing, or less than nothing.
For most people, cash is the default because it is simple and the money comes back to a bank account they can spend from. SRS makes sense when SRS money is sitting uninvested. CPF makes sense only when the yield gap is wide enough to survive the timing and charges, and when that OA money is not about to be needed for housing.
Arjun compared all three for his next application and found the CPF gap too thin to bother with that month. Look up your own bank's closing times for each route, and the OA rate CPF Board publishes now, so you can run the same comparison with real numbers.
Check your own bank's T-bill application cut-off time for cash, SRS and CPF and note the CPF OA interest rate currently published by CPF Board.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).