Mr. Tan,
From 1 January this year, interest rate for savings in the Special, Medisave and Retirement Accounts (SMRA) is pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. The average yield of the 10YSGS over one year, from 1 March 2007 to 29 February 2008, plus 1% works out to be 3.75%.
According to the news, CPF Board will only provide a floor of 4% for the Special, Medisave and Retirement Accounts rate for 2008 & 2009 only. The 4% will be lifted after 2 years, and the 2.5% floor rate will apply for all CPF accounts thereafter.
In view that the average yield of 10YSGS from Mar 07 to Feb 08 is only 2.75%, I'm kinda worry about this lower rate.
Furthermore, remember that last year, CPF Board encourage members to transfer their OA to SA and earn a 4% steady yearly compound interest seems to be no longer valid after 2010.
Care to share you comments?
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_10Mar2008.htm
REPLY
I recommend the following:
1. Transfer your OA to SA to earn a higher rate of interest
2. Do not worry that the interest rate will drop below 4% as you still getting 1% higher than the market rate for govt bonds
3. I expect the interest rate to increase, due to higher inflation.
4. If you wish to earn a higher return on your OA, I suggest a low cost diversified fund.
See this FAQ:
http://www.tankinlian.com/faq/savings.html
Tuesday, April 1, 2008
CPF Life Annuity
Hello Mr. Tan
I am 59 years of age and am interested in participating in the CPF annuity scheme. As I have full faith in our government and when given the choice, I will always opt for a government managed program than a private company's.
However, I have been told by a CPF counter staff that the details are still being finalised and that this program will only start in 2013. I am not sure if the staff has given me the right information - why would the government take such a long time to start this program? I wouldn't know if 2013 will be too late for me.
REPLY
The CPF Lfe Annuity scheme is intended for people who reach age 50 in a few years time. You exceed this age. So, it is not intended for you.
You can leave your money in the CPF retirement fund to be drawn down in installments. It will earn an attractive rate of interest, currently at 4% plus 1% bonus on $40,000.
You can buy a life annuity from a private insurance company with your personal savings.
I am 59 years of age and am interested in participating in the CPF annuity scheme. As I have full faith in our government and when given the choice, I will always opt for a government managed program than a private company's.
However, I have been told by a CPF counter staff that the details are still being finalised and that this program will only start in 2013. I am not sure if the staff has given me the right information - why would the government take such a long time to start this program? I wouldn't know if 2013 will be too late for me.
REPLY
The CPF Lfe Annuity scheme is intended for people who reach age 50 in a few years time. You exceed this age. So, it is not intended for you.
You can leave your money in the CPF retirement fund to be drawn down in installments. It will earn an attractive rate of interest, currently at 4% plus 1% bonus on $40,000.
You can buy a life annuity from a private insurance company with your personal savings.
Two layer upfront charge
If you invest in a regular premium investment linked product (which is commonly sold in the market), you are hit with a two layer upfront charge, namely:
a) Distribution charge
b) Spread
The distribution charge is the proportion of the premium that is taken away from your savings during the first few years. Typically, this proportion is about 80% during the first year, 50% in the second year and 25% in the third and fourth years. The total taken away is 180% of the annual premium.
If you invest $500 a month, the amount taken away during the first 4 years is 180% of $500 X 12 or more than $10,000. This is the money that is taken away from your savings to pay commisison to the agent and other marketing expenses.
The net amount that is invested is subject to another upfront charge, called the spread. This could be as high as 5% of the invested amount.
For example, if you invest $500 a month during the first year, only 20% or $100 is invested each month. This invested sum has to buy the units at a spread of 5%. This is another upfront charge. After taking away this charge, the actual amount that is invested is only $95. You pay $500 and only get units worth $95.
If you are buying a regular premium ILP, you should ask about these two layer upfront charge. It is too costly. I advise you to avoid this type of investment.
a) Distribution charge
b) Spread
The distribution charge is the proportion of the premium that is taken away from your savings during the first few years. Typically, this proportion is about 80% during the first year, 50% in the second year and 25% in the third and fourth years. The total taken away is 180% of the annual premium.
If you invest $500 a month, the amount taken away during the first 4 years is 180% of $500 X 12 or more than $10,000. This is the money that is taken away from your savings to pay commisison to the agent and other marketing expenses.
The net amount that is invested is subject to another upfront charge, called the spread. This could be as high as 5% of the invested amount.
For example, if you invest $500 a month during the first year, only 20% or $100 is invested each month. This invested sum has to buy the units at a spread of 5%. This is another upfront charge. After taking away this charge, the actual amount that is invested is only $95. You pay $500 and only get units worth $95.
If you are buying a regular premium ILP, you should ask about these two layer upfront charge. It is too costly. I advise you to avoid this type of investment.
Low cost products
What are the low cost products?
They are:
a) Low cost insurance, i.e. term insurance
b) Low cost, diversified fund
Find out more from this FAQ:
http://www.tankinlian.com/faq/low.html
They are:
a) Low cost insurance, i.e. term insurance
b) Low cost, diversified fund
Find out more from this FAQ:
http://www.tankinlian.com/faq/low.html
Financial planning for the young
I recommends that a young person should save 15% of the earnings. This FAQ shows how this saving rate can contribute towards an income after retirement at age 65:
http://www.tankinlian.com/faq/finplan.html
http://www.tankinlian.com/faq/finplan.html
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