Guide to CPF SA Shielding

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2022/01/08/guide-to-cpf-sa-shielding/

I have written another post on CPF SA Shieldig using T-Bills here: https://pwlcm.wordpress.com/2022/10/05/guide-to-cpf-sa-shielding-using-t-bills/

Refer to the list of acronyms on CPF and Investment in the following blog posts: https://pwlcm.wordpress.com/2022/01/06/acronym-cpf/ https://pwlcm.wordpress.com/2022/01/07/acronym-investment/

Disclaimer: This post is just for educational sharing purposes. Please do your own due diligence on any products mentioned in this post.

What is CPF SA Shielding?

One of the topics frequently discussed in chat groups, online communities and social networking sites is this “hack” called “CPF SA Shielding”.

The origin of CPF SA Shielding is attributed to an article published in Straits Times on 20 October 2019 titled “Four ways to optimise your CPF savings” by Lorna Tan, former Invest Editor at Straits Times then. Specifically it was the first step “Maximising CPF” she described in the article that is now known as CPF SA Shielding or SA Shielding in short.

The whole process of SA Shielding involves 2 different CPF schemes for 2 different purposes introduced at 2 different times:

1. Retirement Account (RA) creation with specific retirement sum at 55th birthday was introduced to address retirement adequacy.
2. CPF Investment Scheme (CPFIS) was introduced to allow investment using CPF savings for potentially gaining higher returns than CPF interest rates.

On 55th birthday, RA is created with up to Full Retirement Sum (FRS, $192,000 for 2022). This FRS amount is first transferred from SA, and if SA savings is not sufficient, the remaining balance would be transferred from OA.

Since SA and OA interest rates are 4% and 2.5% respectively, we naturally prefer RA to be formed more from OA than SA. That is where SA Shielding comes in, where we set aside at least $40,000 in SA and “shield” the remaining balance by investing under CPFIS just before 55th birthday.

After RA is formed on 55th birthday, we can “unshield” by liquidating the CPFIS investment and returning the sales proceeds to SA. And now we have more savings in the two 4% interest rates accounts (SA and RA) than if we don’t do SA Shielding. We gain additional 1.5% interests on the shielded amount as it is effectively transferred from OA to SA.

To understand the above description visually, you may refer to the following articles on SA Shielding that present nice and easy-to-visualize infographics, special credit to a talented friend Kit who did one on her Instagram:

• Kit on Instagram: https://www.instagram.com/p/CZZK_StvL94/
• SingSaver: https://www.singsaver.com.sg/blog/cpf-sa-shielding

• MoneyOwl: https://www.moneyowl.com.sg/articles/sa-shielding-pros-cons/

Selection of CPFIS SA Investment Vehicle

The role of the CPFIS SA investment in SA Shielding is to “hide” some amount in SA from being transferred to RA during the RA creation process. We should be looking at low risk, low cost, low volatility and high liquidity investment products. And we want to keep the investment holding period to within 1 or 2 calendar months so that we would not be missing more than 2 month worth of SA interests.

Among the products approved for CPFIS SA investment, unit trusts meet the low cost and high liquidity criteria. There are zero fees platforms these days (e.g. POEMS, dollarDEX, FSMOne) where we can trade unit trusts without incurring any sales charges, switching fees, and platform fees. And fund houses are guaranteed to transact unit trusts at the Net Asset Value (NAV) price.

There is a wide spectrum of unit trusts with different risk and volatility levels. Those near the lower risk lower volatility end of the spectrum would be money market funds and short term bond funds. I use FSMOne Fund Selector tools to search for candidates with the following parameters:

The tools generated the following Funds Table as of 7 January 2022:

Among the 3 unit trusts listed, the Nikko AM Shenton Short Term Bond Fund has the lowest Risk Rating and the lowest Annual Expense Ratio. It satisfies the low risk low cost criteria we set. Incidentally, this is the same fund Lorna used in her own SA Shielding manoeuvre.

To study the volatility of this fund, I have downloaded its historical price data (up till 31 December 2021) from Yahoo Finance: https://sg.finance.yahoo.com/quote/0P00006G1T.SI/history?p=0P00006G1T.SI

I added 2 columns to the spreadsheet, 5-Day Price Move and 10-Day Price Move. This is to study how much did the price move in 1-week and 2-week periods. I searched for the largest loss the fund incurred and the date that it happened. Here is the result:

The largest 5-Day and 10-day losses were -0.98% and -1.70%, both happened on 25 March 2020, during the fast and furious stock market crash due to COVID-19 pandemic. To reduce the volatility risk, we want to keep the holding period as short as possible. Adding potential loss of up to 2 months of SA interests (4% x 2 / 12 = 0.67%), total loss might be up to 1.65% if we keep to 5-day holding period. This loss can be recovered by about 13 month of additional 1.5% interests.

Preparation for SA Shielding

1. If you don’t already have an unit trust trading account, you need to open one with zero fees platforms, such as POEMS, dollarDEX or FSMOne (even though FSMOne charges platform fees for cash and SRS unit trust investments, it is zero platform fees for CPF investments).
2. As unit trusts are considered unlisted Specified Investment Products (SIPs), you need to pass Customer Knowledge Assessment (CKA) with your unit trust platform. CKA is a self-declaration based on investment experience, working experience or education qualification.
3. If you didn’t pass CKA, you can take and pass the CPFIS Self-Awareness Questionnaire (SAQ) on CPF website. You would need to send your SAQ Status PDF to your unit trust platform and request them to link your trading account to your CPF account for CPFIS SA investment.
4. Some platforms may require you to link your trading account to your CPF Investment Account (CPFIA). If you don’t already have a CPFIA, you can open one with UOB, DBS or OCBC, where UOB has the lowest agent bank fees currently.
5. You might want to test out placing a set of small buy and sell orders using SA just to get yourself familiar with the process and the timeline with your unit trust trading platform.

Steps to do SA Shielding

1. Let T be your 55th birthday, then T+m and T-n means m trading days after and n trading days before birthday respectively.
2. On T-3 Day:
3. Check the amount in your SA reserved under Retirement Sum Top Up (RSTU) Scheme for transferring to your RA at age 55. You get the Reserved Amount by login to your CPF account, go to Account services – Viewing your account balance, then click the link View amount reserved in your account(s).
4. Determine the Set-Aside Amount in SA, which is $40,000 or the Reserved Amount, whichever higher.
5. Decide the Shield Amount you want, which can be up to your current SA Balance minus the Set-Aside Amount.
6. Place a buy order of the Shield Amount on the Nikko AM Shenton Short Term Bond Fund.
7. You may get a call from your trading platform to confirm the order because the amount can be quite large.
8. On T-2 or T-1 Day:
9. Depending on the cut off time of the trading platform, the Shield Amount would typically be deducted from your SA on T-2 or T-1 day.
10. The Allocated Units you get for the Nikko AM Shenton Short Term Bond Fund would be made known by the trading platform after the Fund Manager has done the calculation of dividing the Shield Amount by the Fund NAV on the purchase date.
11. On T Day:
12. RA would be formed with FRS by transferring the Set-Aside Amount left behind in SA and the remaining balance from OA.
13. You can login to your CPF account and check that RA is formed.
14. Upon confirming RA creation and Allocated Units, you can place a sell order of the Allocated Units on the Nikko AM Shenton Short Term Bond Fund.
15. On T+3 Day:
16. The sales proceeds would be credited to your SA probably on T+3 day.
17. Shielding P&L would be the sell price on T day minus the buy price on T-3 day.
18. The holding period would be less than 5 trading days if the whole process is proceeded smoothly.

To Shield or Not To Shield

The benefits of SA Shielding is 1.5% higher interest rate for the Shield Amount, but at a potential risk of up to 1.65% loss in the process, a loss that is recoverable within 13 months. Therefore, it is generally beneficial to go for SA Shielding for those below age 55, except for the following situations:

• Risk averse person who simply can’t withstand any amount of loss.
• Technophobia who is afraid of going through the whole process of account opening, monitoring and trading.
• High net worth individual who can’t be bothered with such a relatively small benefits.
• Someone with low CPF savings where not much excess SA balance is available for shielding and low OA balance to make up FRS amount for RA.
• Someone who needs to withdraw from CPF accounts soon after unshielding.

May the Shield be with you!