CPF - Special Account

Last week I wrote about CPF minimum sum and in the end introduced two main accounts namely Ordinary Account and Special Account. Besides that, there is another accounts - Medisave Account.

Remember in our previous issue, I wrote the interest rate for these account. Special account (4.0% p.a) has higher interest rate than ordinary account (2.5% p.a) and why does this happens? (The interest rate is correct on the date this article is written). Special account is more on long term investment (retirement) and high interest gives good saving in the long term. This also applies to Medisave Account which important for health/medical services, therefore it is easier for us to build up Medisave if the interest is higher. (Medical fees is very high in Singapore)

The saving in Ordinary Account can be transfered to Special Account in order for more interest rate but there is a limit you can do it which is the Minimum Sum in that year. For example $90,000 is the minimum sum on 2005, if you have $100,000 in your Ordinary Account. You can only transfers $90,000 into Special Account. Note that this transfer is irreversible!

The question is where do you want to save your money into? Do you need to transfer up to the Special Account maximum? Below is the function of each account:

1. Ordinary Account - the savings can be used to buy a home, pay for CPF insurance, investment and education.
2. Special Account - for old age, contingency purposes and investment in retirement-related financial products.
3. Medisave Account - the savings can be used for hospitalisation expenses and approved medical insurance.

If you see, transferring fund into Special Account is something like putting your money into another small safe in a safe. You can't use it so easily compared to Ordinary Account. Even if CPF Investment Scheme, you can only invest on limited investment plans. As a trade off, you get more 1.5% p.a interest. How does this 1.5% p.a interest gives impact to your retirement? Below is calculation of compound interest with Future Value:

Let say your starting salary is $2,000 with full CPF contribution (20%+13%) and 2.5%p.a. You have an increment of 5% each year for 30 years. The total saving is about $355,000. For 4.0%p.a, your total saving is about $460,000 which is about $105,000 higher. (I actually didn't consider the maximum amount in Special Account in this calculation.)

For local Singaporean, buying HDB is something you can't escape from so you can't put everything into your Special Account. Besides, you need to support your children's education through EduSave. So you need a certain amount of Ordinary Account fund.

But for foreigners, is transferring to Special Account is better? I shall say if you are a risk taker, your saving will not be so "fluid" in Special Account which means transfer lesser the better. But if you want to play save, getting 1.5% more per year is better since you can also invest using Special Account. For most foreign workers I would recommend max the Special Account since you will be taking back all your money when you are retired to your hometown. Consider the exchange rate SingDollar to Malaysia Ringgit, you will be millionaire once you go back home.

Even if you are recommended to save for retirement, you still need to maximize your Special Account gradually and make sure you have a good ratio between Ordinary Account to Special Account. You can invest using both accounts and I will write more on CPF Investment Scheme in next article. Until then, thanks for supporting us.