How does the CPF interest system works?

[metamofia89]

What I know: OA is rated as 2.5%pa, SMA rated at 4%pa each. We can get an additional 1%pa on OA and SMA each, for the first $60k on the total balance.

So assuming the following scenario below:

OA: $80k
SA: $30k
MA: $15k

OA interest rate is straight forward. 3.5% of $20k. How does the interest rate for the remaining $40k (out of the first $60k) works since the SMA has a balance of $45k?

 

[curious_moo]

What I know: OA is rated as 2.5%pa, SMA rated at 4%pa each. We can get an additional 1%pa on OA and SMA each, for the first $60k on the total balance.

So assuming the following scenario below:

OA: $80k
SA: $30k
MA: $15k

OA interest rate is straight forward. 3.5% of $20k. How does the interest rate for the remaining $40k (out of the first $60k) works since the SMA has a balance of $45k?

It does not matter where the additional 1% is calculated (be it OA/SA/MA). The interest amount is the same as long as the principal u used to calculate it the same.

The rates remain the same at OA (2.5%) and SMA (4%).
So in your example, the interest is as follows:

(MAX($60k, OA+SMA)*1%)+OA*2.5%+SMA*4%
= $60K*1% + $80K*2.5% + 45k*4%

Hope this clarifies.

 

[dork32]

OA interest rate is straight forward. 3.5% of $20k.

oa interest is never at 3.5%
it is at 2.5% into oa and 1% into sa

 

[curious_moo]

oa interest is never at 3.5%
it is at 2.5% into oa and 1% into sa

that is a totally wrong statement.
OA can earn up to 3.5%
SMA can earn up to 5%

it all depends where your first 60K is parked.

 

[BBCWatcher]

I didn't understand curious_moo's explanation, so I'll try another one.

If SA+MA+RA is equal to or greater than $60,000, you get all bonus interest.

If not, then up to $20,000 of your OA balance counts toward meeting the $60,000 threshold.

All bonus interest is credited toward your retirement: into SA (under age 55) or into RA/CPF LIFE (age 55 and older). Bonus interest is not paid into OA or MA.

In this scenario:

OA: $80k
SA: $30k
MA: $15k
[RA: $0K -- you're under age 55]

you qualify for maximum bonus interest. SA+MA+RA is less than $60,000, but $20,000 of OA (you have more)+SA+MA+RA is greater than $60,000. Congratulations!

While you've already maxed out your bonus interest, you can now earn 1.5 percentage points more interest if you do any/all of these things:

1. Top up your SA. You may qualify for up to $7,000/year of tax relief when you do that. These top ups must fit within the Full Retirement Sum and must be done before age 55. (Starting on your 55th birthday you can make RA top ups.)

2. Top up your MA. You may qualify for tax relief (on the full amount). These top ups must fit within both the CPF Annual Limit and the Basic Healthcare Sum.

3. Transfer some or all OA dollars into your SA. These transfers can only be done before age 55, and the limit is the Full Retirement Sum. You really should do this for all OA dollars that you no longer expect to need for housing or education, even every month as new OA dollars stream in via payroll contributions (assuming you're working in Singapore).

 

[curious_moo]

Yes, you are right. I forgot about the cap of 20k eligibility for the additional 1% on OA, probably because i always transfer my excess of 20K in OA to SA.
So that formula only works for me haha.

I didn't understand curious_moo's explanation, so I'll try another one.

If SA+MA+RA is equal to or greater than $60,000, you get all bonus interest.

If not, then up to $20,000 of your OA balance counts toward meeting the $60,000 threshold.

All bonus interest is credited toward your retirement: into SA (under age 55) or into RA/CPF LIFE (age 55 and older). Bonus interest is not paid into OA or MA.

In this scenario:

OA: $80k
SA: $30k
MA: $15k
[RA: $0K -- you're under age 55]

you qualify for maximum bonus interest. SA+MA+RA is less than $60,000, but $20,000 of OA (you have more)+SA+MA+RA is greater than $60,000. Congratulations!

While you've already maxed out your bonus interest, you can now earn 1.5 percentage points more interest if you do any/all of these things:

1. Top up your SA. You may qualify for up to $7,000/year of tax relief when you do that. These top ups must fit within the Full Retirement Sum and must be done before age 55. (Starting on your 55th birthday you can make RA top ups.)

2. Top up your MA. You may qualify for tax relief (on the full amount). These top ups must fit within both the CPF Annual Limit and the Basic Healthcare Sum.

3. Transfer some or all OA dollars into your SA. These transfers can only be done before age 55, and the limit is the Full Retirement Sum. You really should do this for all OA dollars that you no longer expect to need for housing or education, even every month as new OA dollars stream in via payroll contributions (assuming you're working in Singapore).

 

[metamofia89]

I didn't understand curious_moo's explanation, so I'll try another one.

If SA+MA+RA is equal to or greater than $60,000, you get all bonus interest.

If not, then up to $20,000 of your OA balance counts toward meeting the $60,000 threshold.

All bonus interest is credited toward your retirement: into SA (under age 55) or into RA/CPF LIFE (age 55 and older). Bonus interest is not paid into OA or MA.

In this scenario:

OA: $80k
SA: $30k
MA: $15k
[RA: $0K -- you're under age 55]

you qualify for maximum bonus interest. SA+MA+RA is less than $60,000, but $20,000 of OA (you have more)+SA+MA+RA is greater than $60,000. Congratulations!

Cheers! And how would you calculate the additional interest in your way? Also, why did you prioritize the $20k cap for OA the least? Is there a hierarchy of how the first $60k is computed? My understanding is, as long as you see the $60k on the pie chart of the CPF app, you’re qualified for additional the interest rate.

I believe curious_moo calculate the additional interest rate as a separate entity, which makes sense because all additional interests is not going to the respective accounts anyway but to SA specifically.

But CPF’s site themselves mentioned up to 3.5% of OA and up to 5% of SMA. So I thought I should calculate using the absolute balances in SA and MA respectively which is why I ran into a brick wall when the SMA balance, after subtracting the ceiling of $20k for OA, is more than the stipulated balance of $40k after subtracting the said $20k.

 

[Clone_]

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

from https://www.ifa.sg/cpf-interest/

 

[BBCWatcher]

And how would you calculate the additional interest in your way?

1% of $60,000 is $600. Bingo, there's your bonus interest: $600. $600 will be credited to your SA. Congratulations again.

My understanding is, as long as you see the $60k on the pie chart of the CPF app, you’re qualified for additional the interest rate.

No. If SA+MA+RA is less than $60,000, then up to $20,000 of OA counts toward meeting the $60,000 threshold to earn maximum bonus interest. If SA+MA+RA is $60,000 or more, you don't even need to look at OA.

You can keep this all simple in your case. You're earning maximum bonus interest, so you're all set in that respect. Now, move onto earning 1.5 percentage points more interest if/as you can.

 

[henrylbh]

All bonus interest is credited toward your retirement: into SA (under age 55) or into RA/CPF LIFE (age 55 and older). Bonus interest is not paid into OA or MA.

Where your info comes from?

 

[BBCWatcher]

Where your info comes from?

Henry, you certainly know how to find CPF’s Web site (“Extra Interest”).

 

[henrylbh]

Above 55 -

OA - 20k
MA - 20k
RA -20k

All bonus interest goes into RA?

 

[JuniorLion]

It does not matter where the additional 1% is calculated (be it OA/SA/MA). The interest amount is the same as long as the principal u used to calculate it the same.

The rates remain the same at OA (2.5%) and SMA (4%).
So in your example, the interest is as follows:

(MAX($60k, OA+SMA)*1%)+OA*2.5%+SMA*4%
= $60K*1% + $80K*2.5% + 45k*4%

Hope this clarifies.

What's SMA?

 

[henrylbh]

What's SMA?

Should be SMRA referring to Special, Medisave and Retirement Accounts.

 

[metamofia89]

That’s much clearer. I don’t understand why CPF must structure their statements as ‘up to 3.5% per annum on OA” and etc. It just makes things more hard to understand.

Thanks again BBCWatcher and everyone else for their inputs!

 

[dork32]

that is a totally wrong statement.
OA can earn up to 3.5%
SMA can earn up to 5%

it all depends where your first 60K is parked.

you are completely wrong.

if you have
oa 20k
sa 0

after 1 year, you will have
oa 20.5k
sa 200

if you know nuts about cpf, please do not come here and post rubbish.

there are a lot of garmen propaganda. blur people like you will fall for it.

 

[dork32]

to me, if the interest is at 3.5%, it means that the principal will grow at 3.5% compounded annually, if you do nothing about it.

cpf oa will never grow at 3.5%

 

[henrylbh]

to me, if the interest is at 3.5%, it means that the principal will grow at 3.5% compounded annually, if you do nothing about it.

cpf oa will never grow at 3.5%

It is clear that balance of up to 20k in OA earns extra 1% but the interest is credited to SA/RA.

If OA 60k, SA 5k and MA 5K, the total interest is (20K *3.5) + (5k*5%) + (5k*5%) respectively. Interest on OA goes into SA.

Although member got combined balance of 70k, he will receive extra interest on balance of 30k only.

 

[henrylbh]

That’s much clearer. I don’t understand why CPF must structure their statements as ‘up to 3.5% per annum on OA” and etc. It just makes things more hard to understand.

Thanks again BBCWatcher and everyone else for their inputs!

More correct to say 3.5% pa on balance up to 20K in OA than 'up to 3.5% pa on OA'.

 

[curious_moo]

to me, if the interest is at 3.5%, it means that the principal will grow at 3.5% compounded annually, if you do nothing about it.

cpf oa will never grow at 3.5%

i am not sure why you need to be so defensive and talking rude.
your understand as you said, is based on your assumption that when someone said OA interest is up to 3.5%, it means compounded annually at 3.5%.
but mind you that I never said that, I merely said that OA amount can earn up to 3.5% interest (i.e. 3.5% interested is calculated on 20k of OA every year), and quite frankly im not sure what is so wrong about that statement. If you have only 20k in your OA, ultimately it means 3.5% p.a for that year, and if you have more than 20k in your OA, you get < 3.5% for that year. If you due diligently transfer to SA in excess of 20k, it means that you do get 3.5% most of the time.

ultimately it doesnt matter where that interest went, its still a 3.5% on 20k of oa. duh. your the one who needs to get ur facts right, and stop putting your assumptions on everyone else's statements.