OCBC 3.88% CPF FD - Worth to Invest?

 

3.88% vs 2.5%

Sounds like a good deal?

OCBC is now offering 3.88% for 8 months of Fixed Deposit using CPF and 3.4% for 12 months Fixed Deposit.  Application is made via branch using CPF ordinary account.

While this may sound like a great deal, there are a few things you need to note before heading to the bank to make a deposit.

1) It is not EXACTLY 3.88%

CPF interest is computed on a monthly basis and credited by 1 Jan the following year. CPF balances used for interest computation are affected by the transactions in your Account. For instance, contributions (including refunds) received this month only earn interest the next month. Withdrawals/ deductions in this month will not earn any interest from this month onwards.

Example

Place FD on 15 Feb for 8 months till 15 Oct.

You will lose interest for Feb from CPF AND interest for Oct from CPF. Effectively, that is approximately one month's worth of interest or 0.208%.

A 3.88% 8-month FD effectively yields 2.58%. The net return is 2.372% or 3.55% pa.

For every 10,000, you will gain $ 237.20 vs $166.67. The net gain is  $70.53

2) CPF pays an extra 1% on the first $60,000 of members' combined balances.

For CPF members below 55, you can earn interest rates of up to 3.5% per annum on the Ordinary Account. It is the current cap at $20,000 for OA.

For CPF members above 55, the Government pays an extra 2% interest in the first $30,000 of the combined balance (capped at $20,000 for OA) 

If your CPF balance is below $20,000, you should leave it in CPF as the upside of 3.55% is not worth it. It only equates to $5 more per $10,000

3) Application is to be done in person at the bank - Opportunity Cost

The time to travel to the bank, the expenses incurred ( bus rides, car parks, etc.) and the waiting time (which can be a few hours) may not be worth it if you are considering placing a small amount in the FD. If you are placing a more significant amount (e.g. $100,000), The extra $700 or so could be worth the effort.

4) CPF may increase interest rates? 

Per the CPF website, savings in the Ordinary Account ('OA') earn the 3-month average of major local banks' interest rates, subject to the legislated minimum interest of 2.5% p.a . While there is no fixed formula, it is explained in detail here.

Source: POSB

Theoretically, it is a blend between average base savings and fixed deposit rates ( discounting promo rates). However, while interest rates may have risen, some banks are still quoting a base rate of 0.05% for more significant amounts. This partially explains why CPF interest remains the same despite interest rates rising.

Nonetheless, should the banks adjust the interest rates for the larger amounts, it would likely lead to a CPF increase in the future. If this is so, locking in the funds at 3.88% promo rates may not be as attractive as it looks.

Should you invest?

The answer may lie in individual circumstances. 

• If your CPF balance is below $20,000, it is evident that there are better financial products to invest in.
• If you are planning to use your CPF to service loans, you must ensure you have sufficient funds for payment.
• If the amount is small ($10,000 or lesser), the effort may not be worth the opportunity cost. 

However, if you have sufficient CPF idling ( $50,000 or more), placing it in the OCBC Fixed Deposit may make sense.

AlTERNatIVE TO FD

SG T Bills

An alternative to Fix Deposit would be short-term products like Singapore T bills. 

Transfer to SA or RA

Also, consider transferring OA savings to SA or retirement accounts to earn higher risk-free interest of up to 6 per cent a year.*

 Members can transfer up to $198,000 to the SA if they are below 55 and up to the prevailing Enhanced Retirement Sum of $298,200 to their RA if they are 55 and above.  Members earn up to 6% on the first $30,000 of their combined CPF balances and up to 5% on the next $30,000.

Disclaimer
This is not an invitation to invest. However, for financial investment, do consult your financial planners for advice.