The Central Provident Fund (CPF) is a government savings scheme that requires Singaporeans and permanent residents to save 20% of their salary to fund their retirement, healthcare, and housing needs. The CPF pays an interest of 2.5% for savings in the Ordinary Account (OA) and 4% for savings in the Special Account (SA), Medisave Account and Retirement Account. An extra 1% interest is paid on the first $60,000 of your combined balance (including up to $20,000 from your OA).
Most Singaporeans use their CPF to buy their homes but only a few know how to invest your CPF in shares. However, over the last 10 years, less than 20% of those who use their CPF to invest in shares made returns larger than the OA’s guaranteed returns of 2.5% — and 45% made a loss. It seems that leaving your CPF alone is the smarter thing to do! And for some people – especially those that love to speculate in stock market — that may very well be the case.
At the same time, knowing when and how to invest your CPF can be extremely useful to grow your retirement fund. In this article, I’ll focus on how you can use your CPF OA to invest in shares (I’ll leave out unit trusts, funds, ETFs, bonds, etc.) and what you need to look to for to protect your CPF savings.
1. Are you eligible to use your CPF to invest?
In order to start investing in shares with your CPF, you need to meet the following criteria:
- At least 18 years old and not an undischarged bankrupt
- Have more than S$20,000 in your OA
The criteria are there to protect CPF members in two ways – to ensure you are at the minimum age to make responsible decisions for yourself and you still have some savings in your CPF even if all your investments go south.
I’ll have to say, though, at 18 most teenagers are more concerned with dating than investing, and losing all your CPF money and being left with only S$20,000 is not going to do much for your retirement (which is why it’s important to protect your CPF investments and reduce your downside as much possible). But anyway, those are the first two criteria.
2. How much can you invest using your CPF?
There are two methods to calculate how much you can invest using your CPF OA. Do note that CPF will always take the lower of the two methods. For this example, let us assume that you have S$50,000 in your OA.
- Method 1 – You can invest up to 35% of the investible savings. Hence you take 35% of S$50,000 will give you S$17,500 to invest
- Method 2 – The first $20,000 of the OA cannot be invested. Therefore, S$50,000 less $$20,000 will give you S$30,000 to invest
In this example, you are eligible to invest $17,500 as this is the lower of the two calculations.
If you are too lazy to calculate your investible amount, don’t worry, the CPF will do it for you. You just have to log in your CPF account and select ‘My Statement’. Under Section C, you can find a segment called ‘Stocks’ which shows you how much you are allowed to invest.
3. How to open a CPF investment account
If you want to invest your CPF OA in shares, you have to open a CPF investment account with an approved CPF investment scheme (CPFIS) agent. There are only three approved CPFIS agents in Singapore, the three local banks: DBS, OCBC, and UOB.
|S$2.50 per 1,000 shares or part thereof. Maximum of S$25 per transaction.||S$2.50 per 1,000 shares or part thereof. Maximum of S$25 per transaction.||S$2.00 per 1,000 shares or part thereof. Maximum of S$20 per transaction.|
|S$2.00 per counter per quarter||S$2.00 per counter per quarter||S$2.00 per counter per quarter|
Once your CPF investment account is approved, pass the account number to your broker and they will do the link-up for you. Moving forward, if you want to buy shares using your CPF, simply inform your broker before the trade and they will proceed from there.
Referring to the table above, you can see that all three banks have similar charges. From what I see, UOB is slight cheaper in terms of transaction costs. Personally, that is the reason I use UOB for my CPF investment account because every dollar saved is a dollar earned.
4. You can only invest in CPF-approved shares
Please note that CPF-approved shares do NOT mean they are safe to invest. They simply fulfil five criteria that qualify them as such:
- The company must be incorporated in Singapore
- The company are listed on the SGX Main Board as primary listing or former SESDAQ shares
- The shares are traded in Singapore dollars
- Agent Banks are allowed by the company to appoint all CPF shareholders of the company as proxies to attend and vote at meetings
- The company must not be on the SGX watch-list
There are over a thousand companies in the SGX and 443 of them are currently CPF-approved shares. You can find a list of all CPF-approved shares here and click on ‘View All CPF Investment Scheme’.
5. Invest only in the right company — and at the right time
When comes to investing my CPF money, I am extremely careful how and when to deploy it. Just by leaving the money in my CPF already gives me a guaranteed return of 2.5% per annum in my OA and 4% in my SA.
To earn risk-free annual returns of 4% right now, you can simply transfer your money from your OA to your SA. Therefore, if you want to invest in shares using your CPF, you need to invest in a stock that is able to generate more than 4% returns every year — or we’re better simply moving our money to our SA (with the caveat that you can only withdraw this money when you’re 55).
There are two things that need to happen before I even use my CPF to invest in shares:
- The right company. The company I invest in must be a mature, stable, dividend-paying company that earns consistent recurring income. I would not invest my CPF money in a cyclical or project-based business whose income is less predictable. Personally, I would also avoid using my CPF to invest in REITs. Even though REITs are relatively stable instruments that pay a high dividend yield, REITs do call for rights issues to raise funds to acquire new properties from time to time. If your CPF doesn’t have sufficient funds to subscribe to the rights issue, then you’ll have to fork out cash to do so or face having your stake diluted.
- The right time. Your CPF is hard-earned money. Hence, we only want to invest it when we’re sure our downside is protected and there’s a good opportunity to earn higher returns. The best time is to invest your CPF is during a market crisis because stocks are priced at the lowest. You can find stable companies that earn a recurring income and pay a consistent dividend trading at a good discount during a crisis. A good dividend stock that usually pays a 4% dividend yield can see its yield go as high as 10% during a crisis. Remember that, all things being equal, the lower the price you pay, the lower your risk and the higher your potential returns.
If you don’t have a suitable investment to make, don’t do anything. Leave your money in your CPF to continue earning interest while you wait for a good investment.