STI: Investing your CPF: How it can go wrong

Sep 6, 2004 
Investing your CPF: How it can go wrong
by Leong Chan Teik

IF YOU are like most Singaporeans, you probably think that $1 in your Central Provident Fund (CPF) account is not the same as $1 in your pocket.

You view the CPF money as being locked away, only to be consumed during some far-off period, while cash in hand can let you do things right here and now.

That sort of mindset can do big-time damage to your retirement nest-egg.

It contributes towards a less rigorous approach to investments in many cases, say financial experts.

The managing editor of Asia Financial Planning Journal, Mr Andy Ong, says: 'Someone I know, who would be very careful about not spending too much on lunch, invested nearly $200,000 of his CPF savings in unit trusts without much thought.

'He didn't know what he was doing, and I think he was just being nice to the female financial adviser. Within a few months, his investments had lost 10 per cent.'

According to Mr Ong, this investor was none too sorry about his paper loss. 'He said: 'I don't see the money, so I don't feel the pain.' '

Experts and readers cite various ways you can do wrong by your CPF savings, or run into difficulties:

RISKING SPECIAL ACCOUNT

YOUR CPF Special Account is truly special in these days of ultra-low interest rates when, for example, savings accounts earn 0.1 per cent a year.

The Special Account pays 4 per cent a year, a return that few investment products approved for investment using money from your Special Account can beat comfortably and with any certainty.

Recognising that, Mr Ong, who is also a certified financial planner, declares: 'I'll never ever touch my Special Account.' He treats it as part of his bond portfolio, which is the safe part of his overall investment portfolio.

Mr Jeffrey Silva, chief executive of Optimus Financial, an independent financial adviser, cautions against using your Special Account to invest in balanced funds with a 60-40 mix of bonds and equities.

To start with, many of such funds can hardly achieve 8 per cent a year, he says.

When the expected annual return is, say, 5 per cent, this gain is equal to or less than a compounded return of 4 per cent when the investment period is long - such as over 15 years.

'What this means is that the opportunity cost of using the Special Account is higher than most people think,' says Mr Silva.

The only products that Optimus currently recommends for Special Account money are deferred annuities, for which compounded returns can be much higher than 4 per cent even after deducting charges, he adds.

BIG WITHDRAWALS

IN THEIR desire to have a home that is mortgage-free, schoolteacher Tham Siang Wah, 31, and her husband have withdrawn a total of $48,000 from their CPF savings since 2000 to pay off chunks of their loan.

But that led to a shock for them when they received a letter from the CPF Board. It said they would soon reach the allowed limit on CPF withdrawals for their three-room flat on Mei Ling Street.

As a result, in three months' time, Ms Tham will no longer be able to use her CPF savings to pay her monthly mortgage instalment of $280. She will have to pay cash.

'If we had not made the lump-sum payments, we would not have reached the withdrawal limit so fast. I now figure that I would have 14 more years before reaching the limit,' she says.

After speaking with HDB officers, she believes hers is not an uncommon case.

Chartered financial consultant Leong Sze Hian warns that most people will have a hard time calculating the so-called Available Housing Withdrawal Limit (AHWL), which is a recent introduction.

'When I do seminars where the audience includes experts like real-estate agents, I can see they don't know how to calculate the AHWL, and they don't know the implications of it,' he says.

OVER-COMMITMENT

AS WITH cash, you can inadvertently over-commit yourself to long-term payments for an asset bought with CPF savings.

A reader tells of how he signed up in 1997 for an endowment insurance policy that matures in 10 years' time. The annual premium of $12,000 would be paid out of his CPF savings.

Last year, he lost his job and his CPF savings were running low, after he had paid seven years' worth of premiums.

He subsequently stopped paying his premiums, resulting in the policy becoming a 'paid-up' policy - that is, his insurance cover remains in place, but the sum insured is lower than if he could pay his premiums in full.

Worse, when the policy matures in three years' time, his CPF account will receive a smaller sum than he had planned on, reflecting the hefty cut in the rate of return on the policy.

LOW RETURNS FROM PRODUCTS

CONSIDERING that the CPF Ordinary Account pays you 2.5 per cent a year, it makes little sense to take out the money and buy into a product that actually yields less, or just a little more.

Given current interest rates, it's a definite no-no to take out your CPF savings and put them into fixed deposits, for example. The rate on fixed deposits ranges from 0.175 to 1.4 per cent, depending on the tenure and the sum involved.

Consider also the popular endowment policy called G22, which was distributed by DBS Bank and which had a eye-catching durian logo. Its return is guaranteed at 22 per cent over eight years. That works out to 2.52 per cent a year compounded.

It will be eroded after your CPF agent bank deducts $2 a quarter as a service fee over the next eight years.

And don't forget, during the next eight years, the CPF Ordinary Account interest rate could be raised in a rising interest-rate environment, note observers.

TRANSACTION COSTS

USING your CPF money to trade in shares can also be costly if the shares are penny stocks, points out veteran stock investor Kenneth Pang.

The cost of transaction and other fees will eat into your profits, if any.

The CPF agent bank charges between $2 and $2.50 for each lot of 1,000 shares, subject to a maximum of $20 or $25 per transaction.

So if you buy 10 lots of BreadTalk at 21 cents a share (for a total of $2,100), your CPF agent bank can charge you up to $25.

(Other costs incurred in similar transactions involving cash, such as stockbroker's commissions, also apply.)

'If you frequently go in and come out, the costs you are paying come up to a lot. How to make a profit then?' asks Mr Pang, 49.

That's not all: The agent bank levies a service charge of $2 per counter per quarter. This applies to unit trusts too.

If you have a tiny holding of SingTel shares or other shares or unit trusts, the bank charges would add up to quite a bit in the long run relative to the value of your investment, says Mr Pang.

OVER-INVESTING IN PROPERTY

SAYS Mr Pang, who is also a senior associate manager of a realty company: 'Many people have over-invested their future income - which includes their CPF money - in property.'

For those thinking of using their CPF money to buy an investment property, he points out that the gross rental yield in Singapore is reportedly 2 to 4 per cent a year. After costs and expenses, the net yield is barely equal to, or lower than, the CPF interest rate.

'If they are thinking of capital gains, they are being too optimistic,' says Mr Pang.

Agrees Mr Leong: 'You shouldn't over-invest in one sector - just in case it crashes. Nobody knows which is the best asset to invest in over the next 20, 30, 40 years, so you just have to diversify in terms of assets and geography.'