CPF has a rather strange way of calculating interest. In this article, I will explain how CPF interest is calculated and how you can make use of this knowledge to reduce the disadvantage of such a system.

First, CPF interest is calculated on a monthly basis but it is only credited at the end of the year. The interest that is credited at the end of the year forms the new balance for the following year. This method of crediting is not the standard practice in the banking sector. If you check your bank statements such as POSB or OCBC saving statements, you will notice that interests are credited at the end of every month. For fixed deposits, interests are credited at the end of the term period.

Hence, the actual rate of return for CPF is lower compared to a system in which the interest is credited every month all else equal. This is because the former’s interests do not get to compound every month.

Second, how CPF interest is calculated every month is unfair. Interest is based on the *lowest* balance for that month. Thus, it is possible you could end up with a significant loss of interest if you are careless in how transactions are done.

Let’s take for example: your CPF-OA balance on 1st March was $100,000. On 28th March, you make a CPF-OA withdrawal of $80,000 (say for investments or to make partial mortgage repayment). This resulted in the balance falling to $20,000. Hence, the lowest balance for March is $20,000. Thus, the interest at the end of March is calculated as 20000 * 2.5%/12 = $41.67. Notice that the interest for $80,000 was completely lost despite it in the CPF account for 27 days for that month. This works out to be a loss of a whopping 80000 * 2.5%/12 *27/31 = $145.16 of interest!

Knowing this, you can avoid the lost by making the withdrawal on 1 April instead. In this way, March’s interest would be 100000 *2.5%/12 = $208.33.

Another related question is when is the best time to contribute your CPF using say CPF Voluntary Contribution Scheme or CPF Retirement Sum Topping-Up Scheme?

Assuming you want to top-up $37,740 under the CPF Voluntary Contribution Scheme, the best time to top-up is at the end of the month since topping up at the beginning of the month will not earn any extra interest as interest is calculated based on the lowest balance for that month. Of course, in practice, you do not want to top-up on exactly on the last day of the month because you need to take into consideration of the turnaround time required for the computers and the cloud to sync and to run their batch processes at night - you could end up topping up on the 1st of the following month which is the worst-case scenario.

### Extra CPF Interest

The government gives an additional 1% CPF interest for the first $60,000. Another 1% extra of the first $30,000 is also given to those 55 and above.

This interest extra is meant to target those with very low CPF balances. If your balance of your CPF accounts (OA+SA+MA+RA) is $60,000, the CPF interest is $600 a year if you are below 55 and $900 a year if you are above 55.

If you are an older person say above 55 and your CPF balances is or below $60,000, the extra interest increases your CPF effective interest significantly. Let’s say your CPF balance is exactly $60,000, the extra interest increases your effective interest rate in the CPF by 900/60000 = 1.5%. For those with large CPF balance say $500,000, the extra interests are insignificant. 900/500000 = 0.18%.

However, I am always confused by how this extra CPF interest is calculated because it is really complicated. I finally figured it out on 1 November last year when I attended a training session for financial advisers conducted by CPF Board itself.

The amount of money that make up that $60,000 and $30,000 is from the following accounts in order of priority:

1st: CPF Retirement Account balance inclusive of the premium for CPF Life

2nd: CPF Ordinary Account balance (but capped at $20,000)

3rd: CPF Special Account balance

4th: CPF Medisave Account balance

So let’s take for an example you are below 55 and SA=10000, OA=100000, MA=10000, the amount used is 0 (from RA), 20000 (from OA but capped at 20K); 10000 (from SA); 10000 (MA) making a total of $40,000. Unfortunately for this scenario it is below $60,000 and hence this person can only enjoy 40000 * 1% = $400 extra interest a year instead of the full $600. This is despite have a total combine balance of $120,000.

Frankly speaking, I do not know why the government come up with such complicated system as life is already so hard – why making life even harder for financial advisers like me? Why can’t they just use simple combine balance of all accounts?

By the way, these extra interests are credited to the Special Account (if below 55) and Retirement Account (if 55 and above).

### How extra interest impacts retirement planning?

These extra interests are useful for those who are young because their CPF balances are low. Hence, the extra interest increases their CPF effective rate of return significantly.

For those with large CPF balances, the extra interests do not have any material implications.

For those who are older say above 55 and their CPF balance is low, these extra CPF interest do not help at all – practically. Although the CPF rate of return is significantly higher than without the extra 2%, this group of individuals have more serious things to worried about.

By the fact that their CPF balances are low could mean that their actual networth is also very low. This is because of the correlation between CPF balances and salary. The cumulative balances of the CPF is a function of CPF contribution due to salary, interests and withdrawals. Even if a person has used up all his CPF-OA for housing, there should still be a significant amount of money in the CPF-SA and RA when he is 55. I ran a simulation of a person who starts work at 30 years with a monthly gross of $3500 and no bonus and no salary adjustments. His salary remains the same until end of 54. At 55 years old, his CPF-SA/RA is $261,973. His CPF-MA is $133,292 assuming no Medisave deductions for insurances. My simulation is very comprehensive as it takes care of the extra interests, varying CPF contribution rates with age, Basic Healthcare Sum, Full Retirement Sum limits, CPF contribution limits (OW+AW) and the convoluted way of how balances overflow to SA/OA. Of course, my simulation is based on current CPF rules but with some provision for inflation adjustments of the various limits (too long to explain here). But considering CPF Contribution Rates used to be much higher in the past, current CPF Members in their mid-fifties should be seeing a CPF-SA/RA balance of around $200,000 if they had a proper job for the past few decades.

(As a side note, I will not be making an online calculator for this CPF Contribution Simulation but recent clients who engaged my service would have seen the huge spreadsheet that I had to run this simulation to predict their CPF-SA/RA balances which in turn predicts the projected CPF Life payout.)

Thus, I would say that if you are currently in your mid-fifties and your CPF-SA/RA is significantly below $200,000, it is likely you cannot retire as your salary for the past decades were far below what is required. On the other hand, if your CPF-SA/RA is far above $200,000 – congratulations! Assuming you did not squander the CPF-OA into useless properties or investments and you did save/invest prudently outside of the CPF system, then retirement is likely a reality!

Anyway, for those who want to know more about my thoughts on minimum salary required for retirement, please read this post: How to calculate the minimum salary you need to have?.

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Anonymous says

Very Good Article.

All along layman like us when trying to calculate interest earned from our money in CPF of course we based on what we know we get from our money in the banks.

We always found the figures don’t tally somehow (Of course lesser)

K says

Thank Wilfred for this article. I have a qn which I hope you can answer..

My pay is $6k/month. Max CPF contribution for 2017 is $37,740, which is $6k x 37% x 17.

I would like to maximize the interest I can get from CPF @ 2.5%. Supposed I do a voluntary CPF contribution of $6k x 37% x 5 = $11,100 in Jan 2017. 2017 turns out to be a good year for me at work and I receive 5 months bonus in Dec 2017 (This will take me over the max CPF contribution of $37,740 by $11,100). From the FAQ on the website, CPF will return me $11,100 without interest in Jan 2018.

My question is will CPF pay me for the earned interest for my Voluntary Contribution that was made in Jan 2017.

Thanks.

Wilfred Ling says

I am afraid I do not have the answer.

However, even if the initial $11,100 did earn interest, you run the danger of increasing your tax liability significantly. As an employee, there is no tax deduction for the CPF Voluntary Contribution (VC). So the initial $11,100 did not save you any tax. When CPF refund the excess contribution (which is also $11,100) back to you, this amount has no tax deduction too.

xyz says

Best is to confirm with CPF. But from CPF website, it seems your excess VC in Jan will not earn interest as the mandatory contributions from employer takes precedence. I quote from CPF website regarding excess CPF contributions:

“Mandatory contributions made by employers take precedence over voluntary contributions when determining any excess made above the CPF Annual Limit (AL). Any excess voluntary contribution made above the CPF AL will be refunded without interest.”

If you want tax-deductible for CPF voluntary contribution, either cash top up to SA/RA or to MA. Of course all subject to the various limits e.g. FRS and BHS, and the CPF AL of $37,740.

BTW from YA2018 there is cap of $80K for income tax relief, so if you already got plenty of other reliefs, calculate carefully before contributing to CPF SA/RA/MA, if your intention is for tax deductible. Don’t be greedy lah!

Melysa Martinez says

“So let’s take for an example you are below 55 and SA=10000, OA=100000, MA=10000, the amount used is 0 (from RA), 20000 (from OA but capped at 20K); 10000 (from SA); 10000 (MA) making a total of $40,000. Unfortunately for this scenario it is below $60,000 and hence this person can only enjoy 40000 * 1% = $400 extra interest a year instead of the full $600. This is despite have a total combine balance of $120,000.”

With reference to this above. One way to earn max interest is to transfer the OA to SA to make it 40k. That way, the SA will be running in full gear earning 5% interest. I think the government wants to ensure that there is a substantial amount for retirement, hence the incentive of more interest on the SA. Of course, it comes with a cost (not able to draw out the excess of BRS, ERS or FRS till 55)

xyz says

Your MA also contributes to the extra 1%, so if your MA has quite a bit of money already, you don’t need to transfer so much from OA to SA. In your above example, you just need to top up SA to $30K (and not $40K).

11 says

But does all the SA monies take priority over the MAMA fir? For example, if OA 10K, SA 50K, and MA, 10K, how does the extra interest work?

Jasen says

Actually have we thought of looking it the other way? Most people use CPF to pay for housing and upon selling, its a requirement to put it back + accrued interest. I wonder in this case how CPF board again calculate the accrued interest to be refunded back into our CPF and if its using the same formula to be fair.

M X says

It looks like they use the same formula, i.e. monthly computation at the current CPF OA rate and compounded yearly. Source: CPF Website > CPF Schemes > Public Housing > FAQ

MT says

Hi,

I’ve noticed something recently with looking at my CPF contributions. My contributions to the SA account is slightly over $4000 a year while the current FRS is projected to rise at 5000 yearly. This clearly means that without any SA top up, I’d never hit the FRS! This is clearly an issue as I’m not earning less than the median individual income. Unless the OA monies is not eaten up by housing, it’s hard to retire solely with just our CPF.

Wilfred Ling says

The interest will help to increase the amount also. In any case, CPF can only partially help to support one’s retirement. It’s never the govt intention for people to solely rely on CPF for their retirement.

Ou KS says

Hi Wilfred, in your article, you mentioned that at age 55, the CPF MA should accumulate a figure of $133K. How is this possible with the BHS of only $54500 in 2018?

Wilfred Ling says

The future BHS can be very large as it rises every year. Its just a projection.

xyz says

BHS will increase by the rate of medical inflation yearly. For past few years, it’s been around 5%-6% p.a.

At that rate it will hit $133K in about 18 years or less.

So if you’re 37 this year then that’s the amount of BHS you’ll be hit with at 55.

Marc says

Hi Wilfred,

Assuming I have transferred all my OA into my SA. Thus leaving OA – $0, SA – $70000, MA – $54500

How will the calculation of my interest be at the end of the year?

Will the additional 1% interest for the first $60000 be totally on the SA? Meaning that $60000 will get 5% interest.

Thank you.

Chan says

I have the same question!

Duskerdawn says

Hi Marc & Chan,

Just passing by and decided to answer the question for all.

Yes, the total extra 1% interest will be added to the SA.

Since there combined balances hit 60k, you will obtain the full extra 1% which as mentioned by the above post will go into the SA (if you are below 55) and RA (if you are above 55).

Jeremy Tan says

Can you cite your sources that CPF interest is calculated based on the lowest balance?

I cant find the information on how interest is returned to CPF member on the CPF website. Thanks

chonghoong lim says

Hi Wilfred,

I am also struggling to simulate the interests for the OA that CPF will pay for 2 scenarios:

Assuming i am 45 years old, until i am 55 years old (10 years span).

Monthly pay is fixed $6k, no bonus or aws. Assuming i have $80k in the OA now.

Scenario A: Use up $80k OA to offset property (assuming $500k) downpayment and subsequently all of monthly cpf contribution ($1140) in OA to offset the monthly property mortgage.

After 10 years, when i am 55, i would used by $136.8k + accurred interest (not sure how to calculate)?

(appreciate your help pls!)

B: Don’t use any of the OA and subsequently monthly cpf contribution ($1140) until 55 years old.

After 10 years, when i am 55, i would have original $80k + $136.8k+ accurred interest (not sure how to calculate)? (appreciate your help pls!)

Basically i am trying to calculate if i purchase a property , what is the breakeven for the capital appreciation vs not buying property. Not sure if you understand my question thanks!