Friday, August 21, 2009

Calculating CPF interests

After contributing to my CPF account for many years, I admit that I am still not sure how the interests are being calculated and accumulated in my account. The thing that is puzzling me is whether the interests are being compounded monthly, semi-annually or yearly. Upon clarification with a CPF staff, I am now clear about it.
  • Monthly interest earned is computed using the formula [Lowest balance in the month x interest rate per annum] ÷ 12 months
  • Any contribution (including refund into your account) received at any time in a month will start earning interest in the following month
  • CPF interest earned in the preceding year will be credited to CPF account before the 4th working day of January. For example the interest earned in 2009 will be reflected on 4 January 2010
I attach a sample calculation of how the interests are being computed for a typical CPF Ordinary account which is at an interest rate of 2.5% per annum. For simplicity sake, I remove the additional 1% per annum on the first $20k. For this example, the total interests of $1360 earned for the year of 2008 will be credited by 4 January 2009.

Sample CPF calculation


tch said...

It sounds unfair as the interest gained on Jan08 can only bear the interest started from Feb09...

Mike Dirnt said...

hi tch,

thats because your cpf is compounded annually

its more unfair if your interests for 2008 are computed as 2.5% * lowest balance of 2008 or 2.5% * highest balance of 2008

another alternative i could think of is 2.5% * average monthly balance

Anonymous said...

Those who are interest sensitive and want to squeese every cents out of CPF OA when investing OA should know how CPF interest is calculated. As mentioned, it's calculated on the lowest balance of the month.

So any money withdrawn from OA for investment will lose interest for that month. Similarly, any money transferred from CPFIA to OA during the month earns no interest.

Hence any withdrawal should be timed just after the end of the month and any refund should be just after the month.

Another point I understand from the Board is that the monthly CPF contribution from employers must be paid by 14th of each month but interest is calculated on the contribution as though it's deposited on the 1st of that month. Hence, employers who pay late will incur penalty/interest.

For those above 55 and eligible withdraw OA, the requested amount withdrawn will include interest calculated to the month before the withdrawal. In other words, if you want $10k you will get exactly $10k inclusive of interest earned.

Anonymous said...

Sorry, refund should be timed just before end of the month.

Mike Dirnt said...

i dont think there is any need to time your sales. because your sales proceeds go into the agent bank. and i am not sure how much the agent bank interest is, but i believe its not enough to cover the interest "loss" from the cpf.

so just sell if you really need the cpf money.

Anonymous said...

Hi Mike,

Can you help to advise:
Currently, the housing loan interest rate is lower than CPF interest rate 2.5%. Therefore, is it better that we opt for longer loan period (for example 35 years instead of 25 years)?

For example,
25years loan - Monthly payment $1220
35years loan - Monthly payment $920

Instead of paying $1220 from CPF account monthly, is it better that we choose to pay $920 so that the difference ($300) still remain in CPF account in order to earn higher interest rate?