Thursday 3 September 2015

A long term alternative better than the Singapore Savings Bond (SSB)

Many of you have heard about the Singapore Savings bond which offers 2.63% returns if one holds it for 10 years. But did you know there is a long term bond instrument presently in the market, is as low risk as the Singapore Savings Bond but yields a higher return?

Introducing the CPF Special Account (SA)

Yes no mistakes here; the CPF bond is it. However, do note unlike the SSB, it cannot be redeemed at any time, only after you are 55.

How do we buy these bonds?

If you are interested in buying the "CPF bond", just make a voluntary contribution into your CPF Special Account (SA). Furthermore, the CPF Bond accepts any amount; there is no minimum of $500, no $2 application fee charge or risk of not getting your full no of bonds. It is advised only individuals who meet the below criteria makes a voluntary contribution to CPF SA:

(a) Earn $6,000 and below in monthly wages and; 
(b) Are very likely to meet the minimum sums

There are two reasons. Firstly, it is due to the annual contribution limit of $31,450 into CPF. Any amount higher than this, you will not be able to voluntarily contribute. For an individual earning $6,000 monthly, his total monthly CPF contributions will be 37% (20% from employee and 17% from employer) or $2,220. Hence, it is likely he will be close to the CPF contribution limit. CPF will just refund you the amount without interest for amounts above the contribution limit.

Secondly, it is important to meet the minimum sums because we do not want our voluntary contribution trapped in CPF forever. Currently, with the Basic healthcare sum and retirement sum set at $48,900 and $80,500 respectively, I believe it is easy for majority to meet it should we work continuously from age 25 to 55. Using a basic scenario where an individual starts off with a starting pay of $3,000 (inclusive of one month bonus), works from age 25 to 55 with a 3% annual wage increase; the eventual accumulation of CPF proceeds in MA and SA accounts will be approximately $359,077. Hence it is safe to assume we can meet these minimum sums (even if they are adjusted for inflation), and whatever is voluntarily topped up into our CPF SA can be withdrawn in full at the age of 55. After all, CPF are our own savings.

CPF Bond is AAA-rated

When one contributes to the CPF SA account, the money is used to buy special government securities backed by the Singapore government, therefore we are in fact buying a triple A rated sovereign bond.

Do note, as our CPF SA proceeds can only be withdrawn at the age of 55, there is a maturity date for our “CPF bond” (depending on the age you top up the money). For example, if a 27 year old investor voluntary tops up $3,000 into his SA, he will be buying a “28 year CPF bond” (since he can only withdraw the money at 55) which will yield a 4-5% annual return.

Benefits of contributing

There are two benefits. Firstly, the interest provided by “CPF bonds” is much better than ordinary Singapore bonds sold in open market. Let's use the example of a "28 years CPF bond". On the open market, a similar 26 year SGS bond is sold at 3.01% yield. Hey, that is way much lower than my "28 year CPF bond" returns! 

Singapore Government Current Bond Yields

Now let’s use another example of an older folk who makes use of these to invest in bonds; Mr Tan (aged 45) makes a voluntary top up to his CPF SA. Using this mechanism, Mr. Tan is in fact buying a "10 years CPF bond" which still yields 4%. Again cross referencing with the open market, a 10 year Singapore bond is sold at 2.70% yield!

Secondly, you will obtain tax savings for voluntary contributing to your CPF SA. For example, a voluntary top up of $3,000 into your CPF SA will gain you a tax savings of $210 (assuming 7% tax bracket range). This extra $210 can be used as to treat your family to a meal or be used to invest in the STI ETF to grow your wealth.

We are already heavily weighted in bonds

While you may be tempted to invest in these bonds, it is important to know this.

As Singapore Citizens and PR working in Singapore, 37% of our salaries are already channeled into the Central Provident Fund (CPF). Given what I have explained earlier where the proceeds in our CPF are being used to buy special government securities bonds (returns of 2.5% to 4.0%) to fund our retirement. This means much of our net worth is already in bonds. Hence, it is unwise to invest more of our wealth into bonds as we will become over weighted in bonds and thus affecting our returns. Personally, I will recommend for approximately 40-50% of our net worth to be in bonds.

So how do we calculate our portfolio weightage? Suppose Mr. Tan has cash savings of $50,000, stock holdings of $50,000, a 5 year retail bond of $50,000 and a CPF total balance of $50,000. From this scenario, Mr. Tan will have a portfolio of 25% cash, 25% stocks and 50% bonds (CPF + retail bond).  

To conclude should you feel you need a larger allocation to bond; you may consider the “CPF bond” for long term bond investing.


  1. I didn't know there is a CPF contribution limit. Where did you get the information from?

    1. Hi Sweet Retriement,

      Here is the link, see FAQ under making voluntary contributions

  2. Refer to:

    "After setting aside your Full Retirement Sum or Basic Retirement Sum with sufficient property charge/pledge and the current MMS of $43,500, you can choose to withdraw the remaining CPF balances (excluding top-up monies, government grants, and interest earned in your Retirement Account), or continue to keep your savings in CPF to earn attractive interest. "

    Anyone clarfiy on the excluding top-up monies, is it referring to voluntary contributions too?

    1. It will be good to email to CPF Board to get answers so that one will know the answer is official, and I would encourage you to do likewise, and then share widely.

      Anyway, below are my understanding, one is able to withdraw any sum above what has been set aside for retirement sum under CPF SA. The reason why interest in retirement account is excluded is because of the idea that the retirement interest are meant for CPF Life purposes and not for withdrawal even though the interest is above the 161/80.5k pledge