Investing Your CPF Savings: Is It Worth Putting Them in a Fixed Deposit?

This was originally posted on Planner Bee.

It’s only natural that all of us if we choose to invest our hard earned CPF savings, we want that to be a calculated and wise move. Fixed deposits, a conservative investment choice known for stability and predictable returns, is one option worth exploring. There are several avenues to do this too. In fact, Maybank Singapore has just rolled out its fixed deposit scheme, becoming the first foreign bank to do so.

In this article, we’ll delve into the eligibility criteria, pros, and cons of investing CPF monies in fixed deposits, along with alternatives to consider.

Who is eligible to invest CPF in fixed deposits?

Individuals who are a minimum of 18 years old and not currently an undischarged bankrupt are eligible to invest their CPF savings.

To access funds in the Ordinary Account (OA), you will need to allocate a minimum of S$20,000 in the account and initiate the process by opening a CPF investment account with one of the three local banks – DBS, OCBC, or UOB.

What are the advantages of investing my CPF in fixed deposits?

Investing your CPF in fixed deposits can offer certain advantages, providing a conservative approach to growing your savings. Here are some potential benefits:

Stability: Fixed deposits are known for providing a stable and secure investment option. The capital is typically protected, offering peace of mind to conservative investors.

Predictable returns: Fixed deposits offer a predetermined interest rate over a specified period, providing clarity on the returns you can expect.

Easy to understand: The simplicity of fixed deposits makes them accessible to investors of all levels. The terms are straightforward, making it easy to comprehend the investment structure.

Capital preservation: The principal amount invested in fixed deposits is typically protected, ensuring that the initial sum is returned at the end of the deposit period. This feature is reassuring for those seeking to safeguard their capital.

Diversification within CPF: By allocating a portion of CPF savings to fixed deposits, you introduce a conservative element to your overall CPF portfolio. This diversification can balance risk and potentially enhance overall stability.

What are the disadvantages of investing my CPF in fixed deposits?

While investing your CPF in fixed deposits has its advantages, it also comes with certain disadvantages and limitations that you should carefully consider. Here are some potential drawbacks:

Low returns: While fixed deposits provide stability, the returns are often lower compared to other investment options. For instance, the OA interest rate is currently 2.5%, whereas alternative options may offer higher returns.

Furthermore, taking the example of Maybank Singapore, an investor would have to put in a minimum placement of S$20,000 in OA funds for a duration of 12 months, at a fixed deposit rate of 2.9%.

To work out the return on investment, let’s use the example of Isabelle, an office worker. Assuming Isabelle puts in a S$20,000 fixed deposit with Maybank in January 2024, she will see a profit of S$580 a year later.

However, determining the actual profit involves considering the CPF interest foregone, which hinges on the timing of fund transfers between the CPF and bank accounts. Upon maturity of the fixed deposit, the funds are returned to the CPF investment account. These funds remain there until Isabelle instructs the bank to transfer them back to the OA, or an automatic transfer occurs if the investment account stays inactive for two months.

Assuming the fixed deposit matures in January 2025 and the capital is transferred back to the OA, the invested funds will begin earning CPF interest from February 2025 onwards. CPF contributions, including refunds, earn interest only from the subsequent month. In this scenario, calculations suggest that by not leaving the S$20,000 in the CPF OA, Isabelle could be forgoing approximately 13 months’ worth of interest, totaling S$541.67.

Any delays in the transfer, such as into February, might result in an additional loss of a month of CPF interest. Moreover, there could be one-time and recurring fees charged by the bank administering the CPF investment account. For instance, DBS imposes a S$2.50 fee for each fixed deposit transaction and a quarterly service fee of S$2, excluding GST.

Factoring in these charges, Isabelle would be left with a net profit of S$27 from Maybank’s fixed deposit. It still represents a gain, but whether it is worthwhile to go through the process of it all is up to each individual.

Liquidity constraints: Fixed deposits typically have a lock-in period, restricting access to your funds for the duration of the deposit. This lack of liquidity may pose challenges in emergencies or sudden financial needs.

Interest rate risk: In a dynamic economic environment, fixed deposit interest rates may become less favourable over time. This presents a risk, especially when considering the potentially lengthy duration of CPF investments.

How to invest CPF in fixed deposits

To initiate a fixed deposit under the CPF Investment Scheme (CPFIS), you will have to allocate S$20,000 in your OA and S$40,000 in your CPF Special Account (SA).

You can simply engage in Fixed Deposits (FD) through the CPFIS with any of the four designated Fixed Deposit Banks (DBS, Maybank, OCBC, and UOB).

Directly contact the Fixed Deposit Banks to inquire about the availability of FDs under CPFIS, obtain information on their FD rates, and proceed with the placement of your FD. It’s worth noting that you can place an FD with a Fixed Deposit Bank even if it is not your designated CPFIS-OA agent bank.

Are there any other alternatives?

Considering the limitations of fixed deposits, you could also explore alternatives such as Treasury Bills (T-bills). T-bills are short-term debt securities issued by the government, offering a relatively secure investment option with potentially higher returns than fixed deposits.

Maximise your CPF wisely

Investing your CPF savings in fixed deposits can provide stability and predictability, but it’s essential to weigh the pros and cons. While fixed deposits suit risk-averse investors, exploring alternative options like T-bills can offer a balanced approach.

Before making any investment decisions, you should assess your financial goals, risk tolerance, and explore diverse investment avenues for your long-term financial well-being.

Read more: How To Invest Your CPF Savings