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Should I do a CPF-OA to SA transfer before buying a flat?

Wednesday, April 1, 2015


I received an email from a reader in my age group regarding the purchase of a resale HDB flat. He asked if it would make sense to use up his savings in his CPF-OA to fund the purchase.

As I am not familiar with the rules in the purchase of a resale HDB flat, I would like to share our email exchange here and see if others have any ideas to share:

 

Hi AK,

I know you have blogged a lot about CPF, in particular to build one's retirement fund.


I'm 45 years old. I am buying a re-sale flat, say, $400K. I have $200K in OA and $200K in cash. But I do not want to spend all my cash and hence plan to take a bank loan between $100K to 200K.
 

Would like to know your opinion. Should I use up the money in the OA + cash or cash plus bank loan to fund the purchase?

Leaving the money in CPF (and perhaps transfer OA to SA) seems logical for beefing up my retirement fund. But it will mean I need to pay interest for bank loan, whose trend is increasing.

-------

Hi ,

If you think you are able to take a $100K loan and repay it in full in 8 years, the POSB HDB loan will save you some money still as the interest rate will be capped at 2.5% for the first 8 years. After that, given the rising SIBOR now, it will probably be higher than the 2.6% rate from the HDB Concessionary Loan.

Also, you might want to consider buying BTO, if you are eligible, against buying a resale flat. A BTO 2 room flat costs about $100K which is a small fraction of the $400K you are thinking about for a resale (3 room?) flat. Just being kaypoh. ;p

Best wishes,
AK





Hi AK

Appreciate ur reply.
Unfortunately, I'm not eligible for any new HDB flat :(

Btw, I still have friends advising me to "use up" CPF for housing. They say, govt may increase the min sum and increase the withdrawal age. Hence, our money will be stuck in CPF. 


 Hence better keep cash and invest it for (hopefully) highly return than CPF.

I see merits in their points and yours. Confusing ?


----------

Hi ,

Well, if you are able to use your CPF-OA money to generate higher returns consistently than the risk free 4% offered by the CPF-SA (which you would get if you were to do an OA to SA transfer), then, you should invest the money. When we are doing the comparison, the ideas to bear in mind are "risk free" and "consistently", not "hope". ;p
 

I will say this to your friends:

1. The minimum sum will increase at a rate of 3% per annum.

2. Withdrawal age is at 55 years. You may withdraw anything that is above the minimum sum based on your cohort.

3. Our CPF money is our money. It is not "stuck". It is going to fund our retirement through CPF Life, an annuity.

Please feel free to share my blog posts on how we can make the CPF work for us with your friends. I think you will be doing them a favour. ;p

 

Best wishes,
AK


In this case, I feel that it makes sense to do an OA to SA transfer (maxing out the SA, if possible) before using the balance in the CPF-OA to help fund the purchase of the resale flat.

Of course, before doing this, the reader should consider whether he would be able to repay the loan (i.e. POSB HDB loan*) in 8 years when the interest rate is capped at 2.5%. 

This way, he would be saving on the interest payment for the home loan (in a rising interest rate environment) and also benefit from the higher interest payment on his CPF savings. Sounds good?

*It is 5 years now. Blog post on POSB HDB loan updated.

Related posts:
1. How did AK amass so much in his CPF-OA?
2. A lot of the money in my CPF-SA is from...
3. How to upsize $100K to $225K in 20 years?

19 comments:

ruby said...

How about cash + Cpf + loan? Try to get a loan that allow full payment/partial payment without penalty. It is good to have the option of being able to pay your loan payment through cpf if you are unable to pay through cash. If you comfortable with paying all loan instalment using just cash, then just indicate use $1 in cpf to pay. As this will give you the flexibility to adjust the amount in future.
Hope that you understand what I mean. So that at the meantime, can still have time to see whether 'safe' to transfer from OA to SA.
How much to allocate ( cash/cpf/loan) depends on your comfort zone, needs and cpf contribution etc.

Sammy said...

Hi AK,

Thanks for your post once again.

I've read your CPF posts and I think that earning interest in our CPF accounts is a good idea (why not right?)

But from a self employed point of view, when there is no 16% contributed from the employer, is it still worthwhile to voluntarily contribute to CPF and boost up SA (say if we are starting from scratch)? It will take a lot of cash on our end, and with the minimum sum rising 3% every year, in 25 years time (I'm 30 this year), it will be quite high and we will need to invest quite an amount in order to reach the minimum sum. Whereas the amount of cash can be used somewhere else (investments,property etc).

Slightly off topic, but hope you can share your views!

AK71 said...

Hi Ruby,

I like the idea and it is what I do too. $10 a month from my CPF-OA and the rest in cash which makes much less in interest compared to what the CPF-OA pays.

As the HDB wipes out the buyer's CPF-OA upon purchase of a flat, the question now is whether to transfer some of the CPF-OA money into the SA before it happens? :)

AK71 said...

Hi Sammy,

At the most basic level in anyone's retirement planning, I will say that there is always a place for a risk free and volatility free instrument that pays meaningful interest.

Singaporeans and PRs are lucky to have a tool like the CPF that does the job. We should make full use of the CPF and benefit from the 2.5% to 5% interest rates.

Whether we are self-employed or not, I think that doing a MS-Top Up to our CPF-SA (to enjoy 4% to 5% interest rate) on a yearly basis makes good sense.

$7K a year (because we are allowed income tax relief up to only $7K of top up a year). Even without interest, it would amount to $175K in 25 years.

At 4% per annum, $7K will become $15.75K in 20 years and $19.16K in 25 years. So, those annual top ups of $7K contributed in the earlier years will significantly contribute to your retirement adequacy at 55.

The minimum sum of $161K, 25 years from now, at 3% per annum, would be around $337K.

A back of the envelope calculation tells me that if you were to top up just $7K a year to your SA for 25 years, the government will be doing a lot of the work in helping you meet the MS when you are 55. ;)

ruby said...

Does the HDB still wipe out the OA if using a bank loan? I thought it only applied if using a HDB loan. If it does, then perhaps can buy into money fund (UT) or a very short term FD like 3 months.

AK71 said...

Hi Ruby,

That one, I am not sure. Not all that familiar with the rules.

Ah, I know the strategy that you mentioned. Just to temporarily remove the money from the OA? I am not inclined towards unit trusts because of the fees. Not inclined towards fixed deposits too because they cannot beat the CPF interest rates. ;p

I still prefer an OA to SA transfer. Of course, it is never my way or the highway. I am sure everyone will choose a way that makes sense to them. :)

SeeKay Go said...

Hi AK,

I am currently servicing my bank loan account.

Outstanding loan amount $140k and I've re-priced once 2 years back. The 2 years lock-in period is going to over Aug this year.

I'm considering one of these 2 options:

1). Cash ($40K) + CPF-OA ($100k)

2). Cash ($40k) to reduce the principal amount. Re-pricing again.

By looking at interest rate trending, which option do you think would be a better option? I could only afford maximum cash payout of $40k for the moment.

Cheers,
SeeKay

AK71 said...

Hi SeeKay,

The CPF-OA gives us an interest rate of 2.5% to 3.5% per annum. If you are able to re-finance for the next 2 to 3 years at below 2.5% per annum, I think it makes sense to refinance instead of using the money in your OA to pay down the loan.

If you have no other purposes for the $40K cash on hand, using it to reduce the debt burden could be a good idea if it gives you peace of mind. :)

Lim LS said...

Going off topic:

AK quote:
"The minimum sum of $161K, 25 years from now, at 3% per annum, would be around $337K."

Based on the CPF website, MS will be adjusted yearly based on inflation. How the inflation figured is determined is not stated. CPI/MAS core inflation? Anyone have any idea?

Wow, $337k for MS after 25 years sounds like a high target. Using 3% for estimation is prudent though. But $337k for MS do sounds a little scary for a average 30 year old Singaporean(they will be 55 after 25 years where the MS will apply to them).

An average 30 year old Singaporean should have very little in their OA (due to home purchase) and around $25-35k in SA(based on medium monthly income 2014 which is $3370 and working years of 6 to 10 years). The home purchase with CPF will greatly slow the growth of the OA account. And with the trend of the rising property prices/increase in loan period, OA will have a harder time to grow and even a shorter time to compound when the loan repayment finishes.

As such, I see there is only a few ways to hit the MS...

1) Transfer OA to SA early in your working life and as much as possible. Top up as much to SA early as well. Bigger capital base with a longer compounding period make this strategy more effective. (Something highly recommended by AK)

2) Buy your house within your means. Buying a 250k house as compared to a 400k house means you save 150k (actually more than that if you take in account of loan interest). This will means 150k more in your CPF(if you service the whole loan by CPF). Money not spent is money save.

3) Focus on your work and be good at it. Hopefully with that, your salary will greatly outgrow the inflation and MS increment. Higher CPF contribution means higher chance of achieving the MS.

4) If you are good at investment and getting returns of more than 4%, go ahead and use the OA for it. Do them early so they can compound for a longer time.

5) Lastly, just pray that the inflation is lesser than 3% and the MS is less than 300k after 25 years. Lol

My 2 cents.


Back to topic:

If you can generate returns more than 4%, don't transfer from OA to SA. Use it for investment instead. Same applied to cash. If you can generate good returns, it make no sense to use cash to pay a portion of the loan. But do remember to keep 6-12 months of expense as emergency fund though.

If you can't generate such returns, transferring some from OA to SA do make some sense. Check out the different loan amount/loan period/monthly repayment amount. Compare them and see what will be comfortable to you. Use that to determine how much to transfer from OA to SA.

As for cash component, I still do not really recommend using for house loan since the interest is so low. I rather put them in fixed deposit and deploy them when a major correction/recession comes. But this is my personal preference.

Long post :P

AK71 said...

Hi LS,

Thanks for the very thoughtful and thought provoking comment. I particularly enjoyed the 5 points you made.

This should have been published as a guest blog so that many more will read it. :)

Lim LS said...

Feel free to go ahead.

Just hoping more will have a chance to achieve MS.

The truth is, based on 2013, only 50% of the active CPF member achieved MS. That is including 15% that had pledged their property (which means they pledge their home and have more than half of MS). That is a very low %. Imagine how many of our own people are not meeting this basic standard...

Although they did a study during 2012 that estimated 70-80% of the new work entrants should reach the MS (due to rising wages), I still think the % is still a bit low (provided the estimation did not miss its mark...).

As such, I hope more will put some thoughts in thinking on how to achieve MS. Just contributing my thoughts, hoping it will be of some help to some...

Have a good day.

AK71 said...

Hi LS,

I cut and pasted the 5 points you made on my FB wall with a link to the full comment here.

I cannot republish your comment as a guest blog because Google or Blogger doesn't like that. I used to do that a few years ago and it dropped my Pagerank to zero. They call it the "cookie cutter" technique or spamming. I had to remove all the blog posts to restore my Pagerank.

Well, sharing on my FB wall is the next best thing since I have more than 1,600 followers and friends on FB. :)

If you have a long comment like this in future with lots of wisdom, please email to me and I will publish it as a guest blog. Thanks again. :)

Lim LS said...

Thanks AK for the kind words.

Long comment with "lots of wisdom"? That's too flattering.

I try to email you next time if I start to blabber on too much. Lol.

AK71 said...

Hi LS,

I very much look forward to your maiden guest blog. I hope it won't be too long before you start "blabbering". Haha. ;p

Sammy said...

Hi AK,

Thanks very much for sharing your thoughts. Thanks for your opinions and insight too LS.

Yes from my point of view, 337k is a huge amount, especially if self employed and without any cash in CPF at age 30! Based on a 4k/month salary, 16% employer contribution will already 640/month or 7680/year, and mandatory contribution from employee is 9600/year. Purely the employer contribution will exceed the 7k/year required for the nest egg to accumulate to 175k or more over 25 years (plus compounding will slightly exceed 337k).

Hence it does seem for self employed, unless you earn a lot and can consistently put 7k into your SA for 25 years (580/month on top of the mortgage, expenses, kids etc), not too sure whether its worth it, IF (that's a big if) I can find an investment that generates returns of 4% or more consistently.

Also, 7k a month in 25 years plus interest will be around 350k, and we can only draw out an excess of 15k and the rest is still stuck in CPF until CPF LIFE (which we don't know how it will change in 25 years, maybe drawout age 75 lol).

Just some thoughts..

AK71 said...

Hi Sammy,

Yes, that is a big IF. Well, if you believe like I do that there is a place for a risk free and volatility free instrument in planning for retirement adequacy, you would do that $7K MS-Top Up to your SA annually. :)

At 55, you might not be able to withdraw anything more than $5,000 if you do not hit the higher MS, however, you would have an annuity that will pay you a meaningful monthly allowance for life from age 65.

You might remember what I said before about how most of that money would then actually be contributions by the government. If that makes you smile, you know what you should be doing. :)

Yip said...

Hi AK,

How about the extra 1% on the first 20k of OA? If we wipe out all of OA, we'll lose out on that, won't we?

AK71 said...

Hi Yip,

"An extra 1% interest per annum is currently paid on the first $60,000 of a member’s combined balances (with up to $20,000 from OA)."
Source: CPF Board.

So, if we have do not have any money in the OA but have $60K in the SA, the $60K in the SA will receive 5% interest instead of 4%, for example.

AK71 said...

From a fellow blogger:

Dear AK,

This is my first time writing to you. I have been reading your blog for 1-2 years and have learnt a lot from your inspiring posts. Just last Oct, I have also started on a blog with my 2 other co-writers to share our investment journey too.

Over here, I would like to seek your views/opinions on a scenario on how you would use your CPF OA money for your HDB flat. Sharing a bit of our context. We are exploring possible options to use our CPF OA money before it gets flushed away when we take over the HDB flat. I have recently blogged about this in my post a few days back. The related phrase is as extracted below:

" Recently, my wife and I were engaged in a series of discussions on how we should use our CPF OA money before it gets flushed away when we take over the HDB flat. The common practise is to just wipe out all our available CPF OA money. Instead of that, do we have any other options? Investing in ETFs, stocks, bonds sounds like a option to secure returns higher than 2.6% Loan interest while preserving my future options to use my OA money. Transferring the OA money into my CPF SA is also very tempting if we look at the “more-or-less guaranteed” 4% return. "

My wife and I are still in discussion on this topic. I thought it would be great for us to listen to your thoughts on this as well.

I would like to wish you a wonderful and fulfilling Happy 2017 !! Looking forward to hear from you soon!

Thank you AK !

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