CPF interest for 2016

[BBCWatcher]

Basically, government can save millions of interests if CPF is not compounded monthly.

You might have it exactly backwards. Allow me to illustrate....

Scenario #1: You deposit $1000 on January 1, 2017, into an account with an Annual Percentage Yield (APY) of 5.0% with interest computed monthly and compounded annually. You withdraw the $1000 plus interest on July 1, 2017 (exactly 6 months).

Scenario #2: You deposit $1000 on January 1, 2017, into an account with an APY of 5.0% with interest computed and compounded monthly. You withdraw the $1000 plus interest on July 1, 2017 (exactly 6 months).

Question: Which Scenario provides a bigger withdrawal amount?

Answer: Scenario #1. In Scenario #1 you would end up with $1025.00. In Scenario #2 you would end up with $1024.70, or 30 cents less.

The key here is the Annual Percentage Yield (APY). Fixed deposits in Singapore are (generally) calculated as in Scenario #1, as with CPF. But theoretically a bank could advertise a 6 month fixed deposit compounded monthly with an APY of 5%. And actually the nominal interest rate applied in that case would be 4.889%, and (with monthly compounding) that'd generate a 5% APY. If you hold the funds in your account for exactly one year, no problem: APY 5% = APY 5%. But few people do that in a demand account, which CPF is, really (albeit long-term). So if you're comparing accounts with equal APYs, the annual compounding is better than the monthly, and the monthly is better than the daily.

Now, if the nominal interest rate is 5%, and 5%/12 is applied each month, that beats an account with a 5% APY compounded annually. But that isn't what typically happens when savings products are marketed and compared, because they're generally compared on the basis of APY.

 

[Squaredot]

Did anyone & everyone bother to ask why?

ask why is interest calculated monthly on the lowest balance in each month?

 

[Mecisteus]

Rule of thumb is:

If you are looking at nominal interest rate, an account with daily compounding > monthly compounding > annually compounding.

If you are looking at APY, all the accounts with the same APY are giving the same yields regardless of compounding.

Do you agree with me?

From a CPF point of view, the nominal interest rate is let us say 3.5% pa.

It is costing them more $$$ if the interests are compounded monthly compared to annually.

This is what I meant.

PS: Singapore banks advertise in nominal interest rates. So is CPF. APY is more to the Americans.

 

[kehyi4]

In any case: "Interest crediting is in progress and will be completed by the 4th working day."

which means we might need to wait until 6 Jan (Fri). ah well...

 

[Mecisteus]

Rule of thumb is:

If you are looking at nominal interest rate, an account with daily compounding > monthly compounding > annually compounding.

If you are looking at APY, all the accounts with the same APY are giving the same yields regardless of compounding.

Do you agree with me?

Oh I am referring to final end of year value in doing the comparison.

 

[Mecisteus]

BBCWatcher,

Scenario 1: CPF nominal interest rate 3.5% with monthly compounding

Scenario 2: CPF nominal interest rate 3.5% with annually compounding

Are you saying that scenario 2 will cost the government more $$$ ?

 

[Pesantkie]

I always thought the more you compound, the more interest you have?

Posted with HWZ iPhone 6 Plus HardwareZone Forums app

 

[BBCWatcher]

I always thought the more you compound, the more interest you have.

At equal nominal interest rates, yes. At equal APYs, no.

 

[BBCWatcher]

If you are looking at APY, all the accounts with the same APY are giving the same yields regardless of compounding.
Do you agree with me?

No, for on demand accounts, because of withdrawal timing. Assuming equal interest computation intervals, with the (equal APY) account that has more frequent compounding you lose some of that compounding effect with a "premature" withdrawal. Check my example below.

PS: Singapore banks advertise in nominal interest rates.

They do, but that's also the APY in Singapore (typically) because they compound fixed deposits annually. Fixed deposits are more akin to CPF. For demand deposits they usually compound monthly, but does that matter? Compare the APYs of bank current accounts with CPF APYs if you like.

 

[Mecisteus]

No, for on demand accounts, because of withdrawal timing. Assuming equal interest computation intervals, with the (equal APY) account that has more frequent compounding you lose some of that compounding effect with a "premature" withdrawal. Check my example below.

Yes correct.

I added about end of year value. Accounts with same APY will lead to the same end of year value regardless of compounding. Agree?

So back to the CPF.

Assuming nominal interest rate at 3.5% remains unchanged. Annual compounding costs government lesser than monthly compounding. Agree?

 

[orange_sky]

At equal nominal interest rates, yes. At equal APYs, no.

Cpf doesn't use APY. Not sure why you brought it up to compare

 

[BBCWatcher]

Cpf doesn't use APY. Not sure why you brought it up to compare

In the case of both CPF and typical Singapore bank fixed deposits, the APY is the same as the nominal interest rate. Bank fixed deposits are at least more similar to CPF.

Unrestricted demand deposits (current and savings accounts) might be compounded more frequently, but CPF isn't an unrestricted demand deposit account and doesn't pretend to be.

 

[BBCWatcher]

Assuming nominal interest rate at 3.5% remains unchanged. Annual compounding costs government lesser than monthly compounding. Agree?

At equal nominal interest rates, correct.

Please do keep in mind the total cost of CPF returns also includes the loss of personal income tax revenues to the government since most contributions are pre-tax. That characteristic is unique to CPF.

 

[LiteHouse]

Anyone tried topping SA or MA beyond 2016's ceiling today? Today is 1st day of 2017.

 

[chiokcc]

Topping up is by cheque only, right?

 

[SBC]

Tried e-services a couple of times today. Seem like is a block-off period.

 

[oceanicmanta]

Topping up is by cheque only, right?

also online via CPF e-cashier

 

[awful999]

Anyone tried topping SA or MA beyond 2016's ceiling today? Today is 1st day of 2017.

What you mean by beyong ceiling ? Eg. The SA ceiling is 80k, there is no way to top up more then 80k ceiling, I just tried just now, only can top up less then 7k, by using e cashier got rejected, so I used ocbc internet banking and now the status is pending...

 

[henrylbh]

My father got 73,413 in his RA as of today, all from my OA. The expected interest for this year will be 3,999

My father's RA has been credited with $3,924.15 interest on 31 Dec, exactly $75 short based on my own calculation? His MA not yet credited.

 

[henrylbh]

Anyone tried topping SA or MA beyond 2016's ceiling today? Today is 1st day of 2017.

May be top up towards end of this month.

There is no certainty that today's top-up will earn interest this month.