Greetings,
Over the years, i have many clients who came up to me and asked whether they should be investing their CPF (Central Provident Fund) funds. In this article, I would like to share my views and hopefully, this will enable my readers to make a more informed decision.
History of CPFIS (CPF Investment Scheme)
The CPF Investment Scheme was introduced in 1986 to allow members to invest their savings in a wide variety of financial instruments to grow their pension assets. Members are allowed to use their CPF savings into a variety of instruments including broadly, shares and unit trust. However, not every share or unit trust is approved by the CPF board and thus, members will need to check whether the share or unit trust is available for CPF funds investment. The list of approved unit trust are attached below for your reference. Link to stocks under CPF Investment Scheme.
Cost of Investment
In the earlier years, the commission paid for these investment was very high. Investors were paying 1% for trading fees for share purchases and sales while the sales charge for unit trust investment was 5%. This has greatly negatively impacted the investment return of CPF members. However, good news as the sales charge for unit trust has been changed to ZERO since October 2020.
Sales charge are upfront fees paid to intermediaries (e.g. financial advisors, distributors) upon the purchase of funds i.e. unit trust or Investment-Linked Policies (ILPs). Sales charge is payable upfront as a percentage of the value of the transaction.
This change has reduced the cost of investing for CPFIS members as sales charge is a layer of cost which erodes members’ investment returns over time. This move is in line with other countries such as Australia, the Netherlands,
U.K and the U.S which have banned commissions for financial investments. Removing sales charge eliminates upfront fees paid to intermediaries which in turn increases the eventual amount invested into the funds.
Not everything is created equal, a double edged sword
As you can see from the lists provided above for unit trust and shares that can be invested using CPF funds, it is rather extensive. CPF members do have a lot of choices here. But sadly, not all companies or unit trusts are created equal. Some members have lost money investing their CPF funds as a result of investing into the “wrong” companies or unit trusts.
A company or unit trust which is performing today does not guarantee its performance in the future. As seen by many disclaimers that state “past performance is not a guarantee of future performance”. From statistics, we learned that it is important to manage CPF investments as well and not plainly employing the passive investment style. This is very much applicable to investing into stocks and shares using your CPF savings. One will need to watch the company’s earnings and performance regularly.
Examples (Real company and unit trust):
“Blue chip” company in singapore lets named it XYZ.
If you have bought the company ten years ago, you would be sitting on a paper loss of around 55% after ten years. This is value destruction! You would be better off letting your CPF funds sitting inside your CPF accounts earning a risk-free return of 2.5% annually.
Another example which i will be using a unit trust.
The fund has constantly make negative returns over the different time periods. Over the period of 10 years 5 years and 3 years period, the fund has a return of -2.12%, -1.88% and -2.48% respectively. Again, members would be in a better position if they have kept their funds with the CPF board and earn a risk-free return of 2.5% annually.
From the above example, we can conclude that though members can look to invest their CPF savings to enjoy a higher return, it can also destroy their CPF retirement funds if the wrong company or unit trust are selected.
Success Stories
I have shown some examples of members losing money while investing their CPF savings. But that does not mean that there is no success stories to be shared.
There is a blue chip company listed in the stock exchange of singapore. If you have invested using your CPF fund ten years ago into this company, you would have earned an annual dividend payout of around 4% and your capital would have doubled (not taking into account into the dividends paid over the 10 years). Just based on the capital appreciation, we are talking about an annualised return of about 11% considering dividends which beat the CPF interest rates of 2.5% (ordinary account) and 4% (special account) handsdown.
As for Unit Trust, there is one in the market that has a history of more than 24 years and an annualised return of 7.5% since its inception.
Conditions to start using your CPF funds for investment
- 18 years old or older;
- are not an undischarged bankrupt;
- have more than S$20,000 in your CPF ordinary account; and/or
- have more than S$40,000 in your CPF special account.
The CPF board do restrict the amount available to members for their investment. After members have set aside S$20,000 in their CPF Ordinary account, they can invest up to 35% in stocks; up to 10% in gold; and 100% into selected unit trust; whichever is lower.
Assuming a member has $30,000 in CPF OA
Amount member can use for investment = $30,000 – $20,000 = $10,000
Amount allowed for stocks and shares = 35% X $40,000 = $14,000
Thus, the member can only invest $10,000 in stocks and shares though amount allowed for stocks and shares is 35% of CPF OA balance.
For CPF Special Account, members can invest 100% into selected unit trust after setting aside S$40,000 in their account.
Time in the market rather than timing the market
One thing that i have learned over my more than 20 years of investing, timing the market is almost impossible. No one knows when the next pandemic will strike. During the Global Financial Crisis, no one knows when the market will bottom. Buying low and selling high is relative; as all of us has heard, high can go higher and low can go lower.
One of the best strategies to employ while investing our CPF savings is to use time to our advantage. By doing so, the investor rides out the natural market cycles. For some people, it’s hard to invest that much time in the market, but they should remember how it aligns with their financial goals. Maybe they know that they’ll need the money for retirement or even purchasing a home. By waiting for steady growth over time, smart investors are able to achieve their long-term financial goals, as outlined in their financial plan.
Should I be investing using my CPF savings?
There are both pros and cons to investing using your CPF funds. CPF members do enjoy a risk-free rate of 2.5% for their ordinary account and 4% for their CPF SA account. Without the knowledge or experience of investing, members might be better off leaving their funds inside their CPF accounts to earn the risk-free return.
For members who are willing to take some risk to grow their retirement nest eggs, they should equip themselves with the relevant investment knowledge and learn along the way.Investment is a double edged sword which has the capability of creating value and destroying value.
As members have limited usage for their CPF savings, there is an opportunity cost allowing the additional funds (assuming you have more than $20,000 in your CPF OA and $40,000 in your CPF SA) to sit inside members’ CPF accounts. There are options available to members to possibly enjoy a higher return and therefore, increase our retirement fund when that day arrives. Moreover, CPF members are not able to withdraw their CPF savings until they reach retirement age and thus, aligned to the strategy that i have mentioned above, using time to our advantage. There is a long runway ahead if you are young and that is one natural advantage.
One good solution is to engage a licenced investment advisor in Singapore with vast experience and knowledge to guide you along. If this is something that you are keen to explore, do contact me by filling up the contact form below. I will get in touch with you and answer any queries that you may have with no obligation on your part.
There are some lessons created by CPF board to better equipped members if they decide to start investing using their CPF savings. I have attached below for your benefits.
Conclusion
Investing using CPF savings do have its advantages and its disadvantages. Usually, the disadvantages are due to members’ lack of investment knowledge and experience. This can be mitigated by engaging a licenced investment advisor here in Singapore.
The advantages of an investment advisor:
- Personalised and professional portfolio construction based on your financial goals and investment objectives; all of which are aligned to your risk appetite.
- During market volatility, a go-to person for advice to remove any emotions attached to investment which can be detrimental to your investment return – selling low and buying high.
- A life-time partner in your investment journey as advisor’s objectives are aligned to clients’ objectives. Unlike banks which are compensated based on transactions and not investment returns. This may caused “churning” when clients are asked to sell something and buy something unnecessarily.
I am a licenced investment advisor (by MAS) in Singapore. As such, if this is something that you are looking to explore, do fill up the contact form below and we can discuss further. To know more about me, click here.