Explain floor rates and extra interest, and how interest is worked out each month and credited once a year.
Kelvin, a 32-year-old engineer (an invented example), checked their CPF transaction history in January and found the interest line was lower than the figure they had worked out on a napkin. They had multiplied their 31 December balance by the interest rate, ended up a few hundred dollars (an example figure) too high, and could not see where the difference came from.
The difference comes from how CPF handles interest. At the beginning of each year, interest is credited into each of your accounts. A year-end estimate misses three rules: every account has its own rate, extra interest goes on the first part of your balances, and interest is worked out each month but credited only once a year. With all three in hand, you can predict your January interest line to within a few dollars.
If a CPF statement is new to you, start with Lesson 2.2 of the course "Read the fine print: payslips, statements, policies and contracts", titled "Read the transaction history month by month". It shows where each entry sits.
Each CPF account has an interest rate set by the government, and those rates are reviewed every quarter. The Ordinary Account (OA) pays the least, since money in it can come out early for a home or for education. The Special Account (SA), MediSave and the Retirement Account (RA), which applies from age 55, pay a higher rate because that money is meant to stay in for decades.
The rates are linked to market interest rates. A floor rate is a minimum the government has committed to pay even when the market-linked formula would come out lower. Floor rates cover the SA, MediSave and the RA, and the OA has a separate minimum of its own.
The CPF Board publishes current rates on cpf.gov.sg, together with whether the floors are still in force. Record them before you work out any figure. A rate from memory, such as one you read in a news article two years ago (an illustrative case), will throw off every figure you calculate in the course.
On top of the base rates, CPF pays extra interest on the first slice of your combined CPF balances. Its purpose is to give members with smaller balances a better return. The CPF Board decides three things about it:
how big the first slice is, measured across all your accounts together how much of your OA is allowed to count towards that slice, which is only part of it the account the extra interest is paid into, and whether members over 55 receive more
The OA limit means two people holding the same total CPF can receive different amounts of extra interest. When most of your money is in the OA, part of it may fall outside the extra interest calculation. When your SA and MediSave hold more, a larger share of your balance is counted. The extra interest page on cpf.gov.sg gives the OA limit.
Interest is calculated each month on the lowest balance, meaning the smallest amount in the account at any point in that month. CPF adds up the twelve monthly figures and credits the total in one go at the beginning of the following year.
Take Kelvin's OA in March. On 1 March it held S$40,000. Their employer's contribution of S$1,200 arrived on 10 March, lifting it to S$41,200. On 25 March they used the CPF Education Scheme to pay S$1,000 to a course provider, bringing it down to S$40,200. The lowest point in March was S$40,000, the balance before the contribution came in. Using 3% a year (an example rate only, not the current CPF rate), March interest works out as S$40,000 x 3% / 12 = S$100. Dividing by 12 gives the monthly share of the annual rate.
Three things follow from the lowest-balance rule.
Money paid in partway through a month earns nothing for that month and begins earning from the next one. Kelvin's S$1,200 started earning in April. Lesson 3.4, "Timing a top-up so it earns more interest", picks this up and shows why the month you choose for a top-up matters.
Money taken out partway through a month loses that entire month's interest, even when it leaves on the 30th. This only cuts the month's interest if the balance drops below where it opened. Kelvin's S$1,000 payment did not reduce March interest, since the balance of S$40,200 stayed above the opening S$40,000. A S$2,000 payment would have taken the balance to S$39,200 (41,200 - 2,000), and March interest would have been worked out on S$39,200.
Interest you earn during the year does not earn interest of its own until it is credited. Kelvin's S$100 from March sits uncredited until it is credited at the beginning of the following year, and only then begins compounding. In a single year the difference is small. Across thirty years, it is one reason projections built on monthly compounding come out a little higher than the CPF statement.
For the exact figure, take each month in turn and find the account's lowest balance, multiply it by the annual rate, then divide by 12. The twelve monthly results added together give the yearly credit.
Kelvin's shortcut applied the year-end balance to all twelve months, which pushes the figure up in two ways. It counts contributions that came in late in the year and earned for a few months at most, and it leaves out the months when the balance was lower.
Working through the exact method by hand each year isn't needed, because a quick estimate is close enough. Begin with each account's opening balance for the year and work out a full year's interest on it. Then, for every monthly contribution, add interest for the whole months left in the year after it arrives. Lesson 1.4, "Build your contribution and interest worksheet", builds this estimate in a spreadsheet and checks the result against your CPF statement.
Begin with the rules, and leave your own balances until later. On cpf.gov.sg, record the current interest rate for each account, along with the floor rates and whether they are still in force. Next, find the extra interest rules: how big the first slice is, how much of the OA counts, which account receives the extra interest, and any extra for members over 55. Hold on to these figures, since the extra interest limits go into the Lesson 1.4 worksheet.
Then log in with Singpass and look at your own balances, and at last year's interest in your transaction history. With this year's rates and the extra interest limits written down, work out how much of your combined balance qualifies for extra interest.
Look up the current interest rates and extra interest rules, then write down how much of your combined balance earns extra interest.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).