You will be able to explain floor rates, extra interest and how interest is computed monthly and credited yearly.
Every January a line appears in your CPF transaction history that you did nothing to earn: interest, credited to each account. Kelvin, a 32-year-old engineer, noticed his was smaller than he had worked out on a napkin. He had taken his balance on 31 December, multiplied it by the rate, and expected that figure. He was off by a few hundred dollars, and he didn't know why.
The gap comes from three rules. Once you know them, you can predict the January line within a few dollars, and you can see why the date you move money in or out of CPF matters.
The government sets the interest rate for each CPF account and reviews it every quarter. The Ordinary Account rate is the lowest, because OA money can leave early for a home or education. The Special Account, MediSave and, from 55, the Retirement Account earn a higher rate, because that money is meant to stay put for decades.
The rates are linked to market interest rates, with a floor rate under some of them: a minimum the government has committed to pay even if the market formula would give less. The floor applies to the SA, MediSave and the Retirement Account, and the OA has its own minimum. The CPF Board publishes the current rates, and whether the floors are still in force, on cpf.gov.sg. Write those down before you calculate anything. A rate you remember from a news article two years ago will put every figure in this course off.
On top of the base rates, CPF pays extra interest on the first slice of your combined balances. The idea is to give members with smaller balances a better return. The rule has three parts, and the CPF Board sets each one:
How large the first slice is, counted across all your accounts together. How much of the OA can count towards it, because only part of the OA is allowed in. Which account the extra interest is paid into, and whether members over 55 get more.
Because only part of the OA can count, two people with the same total CPF can earn different extra interest. Someone with most of their money in the OA may have some of it left out. Someone with a fuller SA and MediSave counts more of their balance. You'll put the current figures for these limits into your worksheet in lesson 1.4, so look them up now and keep them beside you.
This is the rule that explains Kelvin's napkin. CPF works out interest every month, but it does so on the lowest balance in the account during that month. It then adds up the twelve monthly amounts and credits them all at once at the end of the year.
Here is March for Kelvin, with made-up figures. His OA held S$40,000 on 1 March. On 10 March his employer's contribution of S$1,200 arrived, taking it to S$41,200. On 25 March he paid S$1,000 to a course provider under the CPF Education Scheme, bringing it down to S$40,200. The lowest balance in March was S$40,000, the figure before the contribution landed. At an example rate of 3% a year, which is not the current CPF rate, March's interest is S$40,000 times 3% divided by 12, or S$100.
Three things follow from the lowest-balance rule.
First, money that arrives during a month earns nothing for that month. Kelvin's S$1,200 started earning in April. That is why lesson 3.4, Timing a top-up so it earns more interest, cares about which month you top up.
Second, money that leaves during a month stops earning for that whole month, even if it left on the 30th. Kelvin's S$1,000 payment didn't cost him anything in March, because the balance after it, S$40,200, was still above the opening figure. Had he paid S$2,000, the balance would have dropped to S$39,200, and March would have earned on that lower amount.
Third, interest earned this year doesn't earn interest until it is credited. Kelvin's March S$100 sits uncredited until the end of December, so it starts compounding only from January. Over a year the difference is small. Over thirty years it is part of why projections that compound monthly come out a little higher than your statement.
Kelvin's napkin used his year-end balance for all twelve months. But that balance included contributions that had arrived only in the last few months, and those had earned for a few months at most. It also ignored the months when his balance had been lower. The right method is twelve small calculations: the lowest balance each month, times the rate, divided by twelve, added together.
You don't need to do that by hand every year. For a good estimate, take each account's opening balance for the year, work out a full year's interest on it, and then add interest on each month's contribution for the number of whole months left after it arrives. Lesson 1.4, Build your contribution and interest worksheet, sets that up in a spreadsheet and checks it against your statement.
Everything you need is on cpf.gov.sg. It lists the current interest rate for each account, the floor rates and the extra interest rules. The page on extra interest also says how much of the OA counts. Your own balances and last year's interest are in your transaction history after you log in with Singpass. If you haven't read a CPF statement before, lesson 2.2 of Read the fine print: payslips, statements, policies and contracts, Read the transaction history month by month, shows you where each entry sits.
Start with the rules rather than your balances. Once you have this year's rates and the extra interest limits written down, you can work out how much of your own combined balance qualifies.
Look up the current interest rates and extra interest rules and write how much of your combined balance qualifies for extra interest.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).