Thumbs Up For Higher Interest Rates

Source : The Straits Times, Tue, Aug 21, 2007

TECHNICAL officer Subhas B. spoke for many polled yesterday when he welcomed the proposed 1 percentage point increase in Central Provident Fund (CPF) interest rates.

'It means my CPF money will grow bigger as I keep working,' said the 42-year-old.

Beyond keeping the money for retirement, he plans to use part of his CPF savings to fund his three children's tertiary education.

For young Singaporeans like equity analyst Geraldine Seah, 26, the increase means she will have more in her CPF Ordinary Account (OA) when the time comes for her to buy a home.

The duo's cheery response to the higher CPF interest rates announced by Prime Minister Lee Hsien Loong on Sunday, was typical among the 20 people polled yesterday. Almost all hailed the change.

The rates will rise from 2.5 per cent to 3.5 per cent for OA balances, and from 4 to 5 per cent for Special, Medisave and Retirement Account balances.

However, these higher rates will be given for only up to $60,000 of a CPF member's combined balances.

Still, more than half the population of active CPF members will benefit, said PM Lee at the National Day Rally.

He later noted that half of those who are still working have $45,000 or less in their CPF accounts.

What they stand to gain is not small beer.

A 21-year-old earning $1,700 a month, for example, can expect to get $20,000 more in interest when he reaches age 55, even after using CPF savings to buy a four-room flat over the course of his work life.

It is a prospect that pleases childcare teacher Siti Zaheerah Mohd Zaaba, 23, who earns below $1,500 a month.

'I would like to buy a flat when I get married, so it's helpful to have more money in my CPF. Also, I don't know much about investing so I'd rather leave the money in there and let it earn interest.'

Financial planner Mahendran Janarthan said older people can also gain from the new rates by shifting spare funds from their OA to their Special Account to get a risk-free 5 per cent rate of interest.

The Government's move to pay more interest is in response to longstanding calls for better CPF returns.

It will cost the Government about $700 million a year, and is aimed at helping lower- and middle-income Singaporeans to build a bigger retirement nest-egg.

Mr Lee said the change must receive President S R Nathan's stamp of approval. '[It] must be properly justified and must pass muster and inspection by the Elected President, which is the way we have done it. And we've briefed the President.'

As part of the change, CPF members will not be able to invest their first $60,000 in stocks, unit trusts and other investments under the CPF Investment Scheme.

This left civil servant Benedict Luo, 26, slightly miffed.

'The Government should give people the flexibility of deciding whether they want to play it safe or take some risks. I'm confident I can earn more than 3.5 per cent by investing on my own.'

However, the president of the Society of Financial Service Professionals, Mr Leong Sze Hian, advises the lower-income to be more circumspect. He warned against committing too much in property, once thought to offer sure-fire better returns.

'The right strategy for the lower-income group is to buy a three-room flat. Don't upgrade; let the rest of your money stay in your account and earn interest.'

By doing so, they can gain from a new scheme that lets specified elderly home owners monetise their HDB homes. The Government will shorten the lease on their homes to 30 years and pay them cash for the lease value foregone.