Compare the three ways to pay for a T-bill and identify the hidden cost of using CPF savings.
Pull up the Singapore Government Securities page on your bank's website and note down three closing times: one for applications paid in cash, one for SRS and one for CPF. Banks list them separately. The CPF time tends to fall earlier than the cash time, in some cases several days earlier, because the money has to move through CPF first. With all three in front of you, you won't settle on a way to pay and then find its application window has already shut.
There are three sources of money for a T-bill: cash, your SRS balance and your CPF Ordinary Account (OA). Each carries a hidden cost, which is whatever that money would have earned had you left it in place. Counting that cost for each source is how you compare them fairly.
Take Arjun (an invented example), who is getting ready for his next T-bill application. His savings account holds some cash, his SRS account holds a small amount and his OA balance is healthy. A friend has told him that paying through CPF is a free lunch, since "the T-bill pays more than CPF". The bill might well pay more. It might also leave Arjun barely better off once he counts the interest his OA money stops earning while it is invested.
Cash is the route most people use. Before you apply, you need a CDP account (Central Depository account) linked to your bank account. It is the same account that holds any SGX shares you own. Applications go through the internet banking or ATM of a local bank that handles Singapore Government Securities. Your bank account pays for the bill, your CDP account holds it, and when it 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", walked through how the payment and the refund show up on your bank statement.
For most people the hidden cost here is small. Money sitting in a savings account that pays very little costs next to nothing to use. Breaking a fixed deposit early is different: the bank charges that deposit's early-withdrawal penalty, and the penalty belongs in your calculation.
SRS is the Supplementary Retirement Scheme. Anyone with an SRS account can use the balance in it to buy T-bills. You put in the application through your SRS operator, the bank where your SRS account sits. The bill is kept within SRS, and at maturity the proceeds return to your SRS account.
Because the money remains under SRS tax rules, a T-bill bought this way does not give you spending money when it matures. IRAS publishes how SRS withdrawals are taxed, so read its guidance before you earmark SRS money for anything you want soon. The main use of this route is to put idle SRS cash to work so it earns a return.
The CPF Investment Scheme (CPFIS) allows you to invest OA savings, T-bills included. You apply through an agent bank, meaning one of the banks that operate CPF investment accounts, and the bill is held in your CPF investment account there. Not everyone can use CPFIS, and there are limits on how much of your OA can be invested. The CPF Board website has the current conditions; check them before you build a plan on this route.
When the bill matures, the proceeds go first into your CPF investment account at the agent bank, not straight back to your OA. If you do not reinvest them, CPF moves them back to your OA automatically at the end of the second month, unless you ask the bank to transfer them sooner. Either way they remain CPF money, usable only for the purposes CPF allows. Before applying, ask your agent bank how to request an early transfer back to your OA and what it charges on the CPF investment account.
Your OA earns interest from CPF Board. Whatever you take out to buy a T-bill earns none of it until it comes back, so the comparison to make sets the T-bill yield against the OA rate. Arjun's friend set the yield against zero. That ignores the interest the OA money gives up and makes the free-lunch claim misleading.
Say Arjun invests S$20,000 of OA money (an example figure) in a 182-day bill, at a time when the OA pays 2.5% a year (an example rate). Simple interest is enough for the sums: S$20,000 x rate x 182/365.
If the cut-off yield is 3.0% (an example figure), the bill earns about S$299 (299.18). Kept in the OA at 2.5%, the S$20,000 would have earned about S$249 (249.32). The gap in Arjun's favour is about S$50.
If the cut-off yield is 2.6% (an example figure), the bill earns about S$259 (259.29). Set against the same S$249, the gap is about S$10.
What you actually gain is less than these sums suggest, for two reasons. Your money normally leaves the OA ahead of the issue date, and after maturity the proceeds sit in your CPF investment account until you reinvest them or they go back to the OA, which happens automatically at the end of the second month unless you ask the bank to transfer them sooner. CPF pays no OA interest on the money during that time, so asking for an early transfer matters. And whatever the agent bank charges comes directly off your gain. The extra interest CPF Board pays on part of your balances is mostly unaffected, because CPFIS only lets you invest OA savings above the amount that must stay in the OA, and that amount equals the OA portion that earns extra interest; the CPF website sets out how it works. With only S$10 at stake, a few dollars on either side can erase the advantage entirely.
The CPF route is worth using when the T-bill yield sits well above the OA rate. When the two are close together, the effort and the timing gaps can leave you with nothing, or with less than nothing.
To run the test on your own money:
Find the OA rate CPF Board is publishing now. Calculate what the T-bill would earn on your amount over its tenor at the cut-off yield. Calculate what that amount would earn in the OA over the same period. Take the OA figure away from the T-bill figure to get the gap. Cut the gap down for the days before issue and the time after maturity until the proceeds are back in your OA, and the agent bank's charges. Go ahead with CPF only if what is left is still worthwhile and you won't need that OA money soon for housing.
For most people cash is the default. It is simple, and the money returns to a bank account you can spend from. SRS is the sensible choice when you have SRS money that is not invested in anything. CPF is worth it only when the yield gap is big enough to cover the timing gaps and charges, and the OA money will not be needed for housing in the near future.
Arjun weighs all three routes for his next application and decides that, this month, the CPF gap is too thin to bother with.
Before your next application, look up your own bank's closing times for cash, SRS and CPF, and the OA rate CPF Board publishes now, then run the same comparison with your real numbers.
Find your bank's T-bill application cut-off time for cash, for SRS and for CPF. Then write down the CPF OA interest rate CPF Board currently publishes.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).