Ways to use CPF money besides taking a punt on shares

Last year, people who put some of their Central Provident Fund (CPF) savings in shares or unit trusts earned returns far higher than CPF interest rates. Even though it may seem attractive to use your CPF money to buy shares, it is important to dig deeper before using them for other investments. What exactly are your investment options?

Compared to time deposits that top out at about 1.25 per cent, individuals may earn a lot more from their CPF accounts.

Interest on money in the Ordinary Account (OA) pay 2.5 per cent per year, while funds in the Special Account (SA), Medisave Account and Retirement Account may earn an even higher rate of 4 per cent or more.

The CPF Investment Scheme (CPFIS) allows you to put OA and SA funds in unit trusts, insurance products, annuities, Singapore government bonds, shares, exchange-traded funds (ETFs), property funds, corporate bonds, gold products and other investments. Some of these options have earned more in recent years.

Making such investments is easy. Simply open a CPF Investment Account with DBS, OCBC or UOB to invest your OA funds, or make investments directly with SA funds. You may then invest your CPF money through banks, insurance companies, brokerage firms or fund management companies.

The returns on some of these investments over the past few years have indeed been good. In the year ending September 2017, the most recent data, CPFIS funds delivered average returns of 13 per cent. Over the past three years, CPFIS-linked funds rose an even higher 19 per cent. Those returns make 2.5 per cent look meagre.

LONGER-TERM RETURNS NOT SO POSITIVE

Probe a bit more, though, and the picture is not quite as good.

For one, longer-term investment results for CPFIS investors are not so positive.

Recent full-year data from CPF shows that although 78 per cent of CPFIS-OA investors made more than 2.5 per cent in 2016, only 49 per cent made more over the previous two years.

As one example, gains of 18.6 per cent in the Aberdeen Asian Smaller Companies Fund over the past year were overshadowed by returns of just 1.68 per cent over the past three years.

Look further back and the results are even more dismal.

Deputy Prime Minister Tharman Shanmugaratnam said in September 2016 that over the previous 10 years, more than 80 per cent of people who invested through CPFIS would have been better off leaving their money in the CPF Ordinary Account. Even worse, he said that 45 per cent of investors lost money due to factors including “behavioural biases in investment” and higher fees.

Investors should also realise that costs for CPFIS investments can be high. CPF data shows that annual expenses for unit trusts range from about 0.3 per cent to about 3 per cent, for instance, and there can be upfront fees as well.

SHIFTING THE ACCOUNT BALANCE

While the high returns over the past year may look great, the longer-term results raise questions about what to do.

If you are a beginning investor or not confident of investing on your own, it may be better to take advice from CPF, which suggests leaving your money in your CPF account and earning risk-free interest. You could end up better than 80 per cent of CPFIS investors.

Even if you take that advice, there are still ways to increase your return.

One is to use funds from your disposable income or savings rather than money from your CPF account to pay your mortgage.

Mortgage interest rates remain low, so you can pay about 1.46 per cent on your loan and make 2.5 per cent or more if you leave your money in CPF.

If you are under 55, also consider shifting some of your OA funds into your SA. Although you won’t be able to use the SA money to pay for your mortgage, you can increase your returns for more of your money from 2.5 per cent to 4 per cent.

If you do decide to invest in shares or other investments, consider using your savings first before touching your CPF account.

With interest rates so low at banks, investing excess savings rather than using money from CPF may be better.

THINK LONG TERM

If you are experienced enough to invest via CPFIS, the key is to be prudent with your retirement money.

You will want to do better than CPF, so you will need to find investments that consistently generate more than 4 per cent, in good times and bad.

If you invest in shares, consider selecting long-established companies that are stable and consistently pay good dividends.

If you want a basket of shares, consider choosing a lower-cost ETF with a good track record rather than a costlier unit trust.

When you see shares returning nearly 20 per cent per year and CPF paying only 2.5 per cent, it is tempting to move your retirement money into CPFIS and buy shares or ETFs.

Rather than being tempted by short-term results, look at better ways to use your funds and consider ways to protect your hard-earned CPF money rather than losing it.