CPF SPECIAL, MEDISAVE & RETIREMENT ACCOUNTS
No more fixed 4% rate; move will spell better returns over long term: Eng Hen
THE Government is moving to float the interest rate of the Central Provident Fund's (CPF) Special, Medisave and Retirement Accounts and peg it to long-term bond rates.
What this means is that Singaporeans will no longer be guaranteed a fixed 4 per cent interest rate on these accounts come Jan 1 next year.
In giving details of the upcoming CPF changes, Manpower Minister Ng Eng Hen yesterday said the move to a pegged rate should, in the long term, mean better rates than at present.
'We think that over time this will be more than 4 per cent and that's why we are doing it and that will also increase further your CPF interest,' said Dr Ng.
'There will be fluctuations, but it'll be less volatile than the stock market. When we introduce it, it'll be a little lower because it's pegged to market at this point of time.'
He did not give further details of the move, saying that the formula will be spelt out when a ministerial statement is released next month.
RELATED VIDEO LINKS : http://tinyurl.com/34lbjsExtra 1% CPF interest and compulsory annuities - details out (3:52)
The interest rate paid out on CPF Special, Medisave and Retirement accounts will no longer be fixed at 4 per cent, but pegged to long-term bonds.
Manpower Minister Ng Eng Hen revealed this today as he elaborated on the technical details of the recently announced CPF changes.
Speaking to the media, Dr Ng also said the payouts for the compulsory annuity will kick in only once a person reaches 85 years of age.
RELATED LINKS : http://www.straitstimes.com/STI/STIMEDIA/pdf/20070821/int.pdf
NEW CPF INTEREST RATES
Dr Ng also said the higher 1 percentage point interest rate, announced by Prime Minister Lee Hsien Loong on Sunday, that would be applied to the Ordinary Account (OA) will not be credited to the OA but will go into the Special Account.
'That makes sense because I'm not giving you the extra 1 per cent to buy a larger home if you can't afford it. I'm giving you that extra 1 per cent to go into your Special Account,' said Dr Ng.
Financial analysts greeted the news with mixed reactions. Some said they had been expecting it while others said they were unsure, based on current bond markets, whether this would mean higher returns.
Other analysts like Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said the volatility would cause unease among Singaporeans.'They have been used to the guaranteed 4 per cent returns for so long and now suddenly it's taken away.'
Chief executive Chris Firth of wealth management firm dollarDEX said the 4 per cent rate was a 'free lunch for members'.
But he thinks the move will protect the CPF Board from promising too much and giving out what is essentially a subsidy.
Most financial analysts were reluctant to speculate on what this would mean in actual returns, as the Government has not given details.
But one possible indicator of what the returns may amount to is the Singapore Government bonds market, said online unit trust distributor Fundsupermart's general manager Wong Sui Jau.
A bond is essentially a loan an investor makes to the bond's issuer, who is typically a government or corporation.
In return, the issuer gives out interest payments until the bond matures, at which point the issuer repays the principal.
In general, the longer the bond takes to mature, the higher the interest or yield.
The current yield for a 20-year Singapore Government bond is 3.2 per cent, said Mr Wong.
'But past performance is not indicative of future performance. Still, the general yield here is about 3.5 per cent or so, which, if is an indication, means the interest rate is effectively cut for the CPF accounts,' he added.
But Mr Roy Varghese, of financial planning firm Ipac, noted there could be potential for higher returns, as the Government might include global bond markets that give a better yield. 'I think it's an excellent move because it will make people have a sense of risk and reward,' he added.
But businessman Chris Lim, 27, was not impressed, wondering if the change would affect his future savings. 'I'm not sure introducing volatility would help me build up my retirement account, compared to previously,' he said.
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