I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
The increase of BHS amount from $68,500 in 2023 to $71,500 in 2024 represents a +4.38% increase. So I have revised the annual % increase of BHS to be rounded to 4.5% and the nearest multiples of $500.
With that change, the BHS projection is revised to the following table:
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
Yesterday (14 February 2023), Deputy Prime Minister Lawrence Wong gave a Singapore Budget 2023 speech in Parliament. The full speech can be watched in this YouTube video: https://www.youtube.com/watch?v=EhjfZWJS9jU
One of changes in this year budget is the increase in CPF Monthly Salary Ceiling. This refers to the Ordinary Wage Ceiling (OWC) as described in my blog post “Guide to CPF Mandatory Contribution (MC) for Employee“.
In summary, the OWC would be raised in 4 steps from $6,000 currently to $8,000 by 2026. Do take note that there is no change to the CPF Annual Salary Ceiling at $102,000. This means that the Additional Wage Ceiling (AWC) remains capped at the formula:
$102,000 – Total OW subject to CPF for the year
With the increase in OWC, the AWC would be reduced for employees with monthly salary higher than $6,000.
For example, for one who earns $8,000 or above, the total OW subject to CPF for the year would become $8,000 x 12 = $96,000, and the AWC would be reduced to $102,000 – $96,000 = $6,000. Just one month bonus would have sufficient to exceed the AWC, resulting in hitting the max CPF Annual Limit (CPFAL) of $37,740 from MC alone.
One interesting note is given in the last paragraph of Section C in Annex E-4:
To ensure that employees earning the same annual salary receive the same CPF contributions regardless of their salary structure, the CPF monthly salary ceiling will eventually be set at one-twelfth of the CPF annual salary ceiling at steady state.
Indirectly, this paragraph gives the intent behind raising the monthly salary ceiling while maintaining the annual salary ceiling. The current OWC and AWC formula gives the employers a way to reduce CPF contributions by shifting part of the bonus into monthly salary while maintaining the annual salary amount.
With this change, the employees will receive more CPF contributions for the same annual salary. The ultimate goal is to achieve the steady state where monthly salary ceiling is 1/12 of annual salary ceiling, and the employees will receive a fair share of CPF contributions regardless of their salary structure.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
In a comment to my Part 1 post, a Seedly community member Nicole suggested additional scenarios to look at, i.e. CPF LIFE payout deferred to age 70. As such, I have added 2 more scenarios to the comparison:
Scenario 1: FRS ($198,800 for 2023) in RA plus BRS ($99,400 for 2023) in SA
Scenario 2: ERS ($298,200 for 2023) in RA
Scenario 3: Scenario 1 with Payout deferred to Age 70
Scenario 4: Scenario 2 with Payout deferred to Age 70
I wasn’t able to use the CPF LIFE Estimator to get the monthly payout amount at age 70 for ERS (which would have grown to $555,063) because the estimator currently has a limit of $500,000 on the RA amount. Therefore, I use the yearly 7% increase to compute the deferred payout amount for scenario 3 and 4.
The Excel spreadsheets to compare scenario 3 and 4 for the 3 CPF LIFE Plans are shown below:
I wanted to put all 4 scenarios side-by-side for comparison, but the table became too wide to view the content legibly. Therefore I break it down to 2 tables comparing scenario 1 and 2 as well as scenario 3 and 4. I have also added more information (Cumulative Income, Income Breakeven Level, Age Income Drop Below, Age Income Breakeven, Age Bequest Become Zero) to facilitate my analysis.
Here is the comparison for scenario 1 and 2:
And here is the comparison for scenario 3 and 4:
However, I still want to do a comparison among all 4 scenarios. It dawned on me to use chart instead of table for comparison. I recalled the initial CPF LIFE Estimator had the useful feature of showing the information against the age in a line chart. So I decided to use that format for Retirement Income, Cumulative Income and Bequest as follows:
I believe these 3 charts will help you see which scenario will generate what kind of retirement income and bequest, when your retirement income for FRS+BRS scenario (scenario 1/3) will drop below ERS scenario (scenario 2/4), and when your cumulative income will breakeven, and when your bequest will drop to zero.
You can make a better informed decision for your own unique situation.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
After comparing 2 scenarios in Part 1 and Part 2, naturally the next step is to compare with CPF LIFE Escalating Plan. As a recap, the 2 scenarios are:
Scenario 1: FRS ($198,800 for 2023) in RA plus BRS ($99,400 for 2023) in SA
Scenario 2: ERS ($298,200 for 2023) in RA
With the CPF LIFE Estimator set to a male born in 1968 (i.e. age 55 in 2023), I get the monthly payout amounts for Escalating Plan to be $1,270 and $1,860 at age 65, and the payout would increase at 2% rate per year, with $1,880 and $2,760 at age 85, $2,300 and $3,370 at age 95, for FRS and ERS respectively:
The different in monthly payout for the 2 scenarios is $590 at age 65, and would increase as the payouts increase, meaning that the drawdown from SA to match up the shortfall would also increase until depleted. Here is the Excel spreadsheet to compare the 2 scenarios side-by-side:
With Escalating Plan, scenario 1 monthly income couldn’t catch up with that of scenario 2 at age 92, the same time when its bequest is dropped to zero. This happens later than that of Standard Plan, but earlier than that of Basic Plan.
Let’s put the income (payout plus drawdown) and bequest of the 2 scenarios for the 3 CPF LIFE Plans side-by-side for comparison:
As we can see clearly from the summary table, here are a few observations:
Scenario 1 is able to keep up with scenario 2 income until its SA is depleted.
Once SA depleted, scenario 1 income would only come from CPF LIFE payout, definitely less than that for scenario 2.
The age when scenario 1 income drops below that of scenario 2 are different for the 3 CPF LIFE Plans, the earliest is age 91 for Standard Plan, the latest is age 96 for Basic Plan, and Escalating Plan is in-between at age 92.
Scenario 1 is able to keep the bequest much longer than that of scenario 2.
The age when bequest drops to zero for scenario 1 are at age 91, 96 and 92 Standard Plan, Basic Plan and Escalating Plan respectively.
The age when bequest drops to zero for scenario 2 are at age 80, 91 and 82 for Standard Plan, Basic Plan and Escalating Plan respectively.
Now, let us get back to the original question people asked: “Should I top up my RA to ERS from my SA at 55?”
I would say, there is no straightforward answer to this question. It really depends on individual situation and preference. Some questions to ponder:
Which do you deem as more important: Income or Bequest?
What is your baseline income amount?
How much do you budget for your retirement expenses?
Do you have other sources of income to supplement CPF LIFE?
How is your health?
Pros for Scenario 1:
It seems to be able to maintain the same income as scenario 2 until at least age 90.
It has higher bequest amount than scenario 2 until fully depleted.
It does have the flexibility in terms of the drawdown amount from SA, meaning we can drawdown varying amount on needs basis, not necessarily must match up to scenario 2 payout.
Cons for Scenario 1:
Its income will drop below that of scenario 2 after SA is depleted.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
In Part 1, I look at 2 scenarios with CPF LIFE Standard Plan. Now I want to compare the 2 scenarios with CPF LIFE Basic Plan. To recap, the 2 scenarios are:
Scenario 1: FRS ($198,800 for 2023) in RA plus BRS ($99,400 for 2023) in SA
Scenario 2: ERS ($298,200 for 2023) in RA
Again with the CPF LIFE Estimator set to a male born in 1968 (i.e. age 55 in 2023), I get the monthly payout amounts for Basic Plan to be $1,460 and $2,150 initially, then drop to $1,390 and $2,080 at later age for FRS and ERS respectively:
In CPF LIFE Basic Plan, only 10~20% of RA is deducted at age 65 as premium for CPF LIFE, and the initial monthly payout is paid from the remaining balance in RA. The drop in monthly payout is affected by the drop in extra interest due to RA balance falling below $60,000.
The difference in monthly payout for the 2 scenarios is $690, or $8,280 in a year. This shortfall is matched up from SA drawdown. Here is the Excel spreadsheet to simulate the 2 scenarios:
I don’t know how the CPF LIFE premium for Basic Plan is determined, so I just pick 15% (the mid value of the range 10~20%) for the Excel simulation.
I also assume a linear interpolation of monthly payout amount from the time RA hit $60,000 till it is depleted. After RA is depleted, CPF LIFE takes over payout and I assume it remains at the last payout amount for life.
With Basic Plan, it seems like the initial payout amount can be maintained till age 86, then gradually drop to last payout amount at age 90. For scenario 1, SA is depleted at age 96, later than the case for Standard Plan.
Similar observation for bequest with Basic Plan as Standard Plan, i.e. scenario 1 have more bequest amount than scenario 2, and it takes later age to deplete the bequest in scenario 1 than scenario 2.
Same summary as in Standard Plan, i.e. scenario 1 has higher bequest amount, but suffer lower payout after SA depleted; whereas scenario 2 can maintain higher lifetime payout.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
One common question people asked is: “Should I top up my RA to ERS from my SA at 55?”
One might consider both SA and RA interest rates are the same at 4% p.a. and wonder what would be the benefits of moving BRS amount from SA to RA. Obviously such move would increase the CPF LIFE monthly payout amount, but at the expense of losing the liquidity of withdrawing cash from SA at our discretion.
So, I set out to compare between 2 scenarios:
Scenario 1: FRS ($198,800 for 2023) in RA plus BRS ($99,400 for 2023) in SA
Scenario 2: ERS ($298,200 for 2023) in RA
Using the CPF LIFE Estimator set to a male born in 1968 (i.e. age 55 in 2023), I get the monthly payout amounts for Standard Plan to be $1,600 and $2,360 for FRS and ERS respectively:
The difference in monthly payout is $760, or $9,120 in a year. To match up the shortfall in payout, we would need to drawdown from SA. When would SA be depleted in this manner? I set up an Excel spreadsheet comparing the 2 scenarios to find out.
I have simplified the calculation for SA interest and drawdown using annual values in scenario 1, but do take note that SA balance would be reducing every month due to monthly drawdown to match up the shortfall in the monthly payout. The actual SA interests earned would be less than those shown in the spreadsheet.
Both scenarios would payout $28,320 annually up till age 90. For scenario 1, SA only has $3,960 available for drawdown at age 91, beyond which SA is depleted and annual payout drops to $19,200.
In terms of bequest, scenario 1 would always have more bequest amount than scenario 2. The bequest amount would drop to zero at age 91 for scenario 1, and age 80 for scenario 2. The additional bequest amount comes from the interests earned in SA.
In summary, scenario 1 is good for those who want to leave more bequest to their loved ones, but would suffer a drop in payout if they outlive the depletion of their SA. On the other hand, scenario 2 is better at maintaining a lifetime payout to address longevity risk.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
The increase of BHS amount from $66,000 in 2022 to $68,500 in 2023 represents a +3.79% increase. So I have revised the annual % increase of BHS to be rounded to 4% and the nearest multiples of $500.
With that assumption, the BHS projection is revised to the following table:
Disclaimer: This post is just for educational sharing purposes. Please do your own due diligence on any products mentioned in this post.
Since I published the blog post “Guide to CPF SA Shielding Using T-Bills” last month, the cut-off yield has crossed 4% p.a. in the 1 November 2022 issue of the T-Bill. The relatively high yield of T-bills had attracted many retail investors to this previously ignored fixed income instruments, not only for the purpose of SA Shielding, but also for general short term investing using cash, SRS and CPF.
Therefore, it makes sense for me to extract what I had written on T-bills from that SA Shielding blog post, amend and expand it to provide an extensive guide on T-bills from a general investing perspective.
What are Treasury Bills (T-Bills)?
T-Bills are short term Singapore Government Securities (SGS) issued by Monetary Authority of Singapore (MAS) at a discount to their face value. Investors would receive the full face value at maturity.
As it is fully backed by the Singapore Government, T-bills are considered a risk-free AAA-rated fixed income instrument. There are 2 tenors, 6 months or 1 year T-bills that MAS issues. The T-bill is issued at S$100 face value.
The interest rate is determined by auction, and the interest is paid as a discount upfront to successful applicants after auction results are released. The full face value of T-bill is returned to investors at maturity.
At the calendar webpage, click the T-bills tab and the “+” button beside the 6-Month and 1-Year T-bill headings to view a complete list of T-bills in the year.
The 4 key dates refer to the dates when T-bill information is announced, when auction results are released, when T-bill is issued, and when it is mature. The Tenor column is self-explanatory, it refers to the tenor of the T-bill.
The T-bill can be identified by the Issue Code (given by MAS) or the ISIN Code (ISIN stands for International Securities Identification Number, a 12-digit alphanumeric code given by ISIN Organization that uniquely identifies a security).
The state of a specific T-bill is given under the Status column:
Upcoming: Refers to upcoming T-bill not yet open for applications.
Open: Refers to T-bill announced and opened for applications, but not yet auctioned, and you can click the “View details” link to read about the Issue Details.
Closed: Refers to T-bill closed for applications, either to be auctioned or issued soon, and you can click the “View details” link to read about the Auction Results after they are released.
The 6-month T-bills are issued fortnightly and the 1-Year T-bills quarterly.
For cash application, you will need an individual CDP account with Direct Crediting Services (DCS) linked to your bank account with one of the 3 local banks (DBS/POSB, OCBC, UOB). Application can be done through the bank’s ATMs and internet banking portal.
For SRS application, you will need a SRS account with one of the 3 SRS operators (DBS/POSB, OCBC, UOB). Application can be done through the bank’s internet banking portal.
For CPF application using OA, you will need a CPF Investment Account (CPFIA) with one of the 3 local banks (DBS, OCBC or UOB) and application can only be done in person at any branch of your CPFIA agent bank.
For CPF application using SA, CPFIA is not needed, but you will need a Debt Securities Account with one of the 3 local banks (DBS, OCBC or UOB). Application can only be done in person at any branch of the banks.
While the T-bills application cut-off time is by noon on the auction day, the banks may close the applications deadline 1 to 2 business days before the auction. It is advisable that you check with your bank for the exact cut-off time. You can set alarm on your mobile phone to remind you to apply for T-bill.
How to Submit the Bids for T-Bills?
The minimum bid amount for T-bills is S$1,000, and you have to submit your bids in multiples of S$1,000. You can submit multiple bids within the same fund source and across different fund sources (cash, SRS, CPFIS). There is a cap of S$1 million per auction, but no limit in term of total T-bills investment amount you can accumulate over multiple tranches.
For this T-bill issue, MAS offers S$4.5 billion to investors. The auction is conducted based on uniform price auction, meaning once the cut-off yield is determined after the auction, those who bid at the cut-off yield or lower will get allotment.
There are 2 types of applications: competitive and non-competitive. Competitive applicants would submit bids (yes, they can submit multiple bids) indicating the minimum yields they are willing to accept, whereas non-competitive applicants do not participate in the bidding process. All competitive and non-competitive applicants who succeed in getting allotment (full or partial) would get the cut-off yield.
There are 3 things you need to decide when you submit your bids for the T-bill:
You decide on which source of funds (cash, SRS, CPF) you want to use to apply for T-bill, and you can use the corresponding channels to apply.
You decide on how much you want to invest (investment amount) in each source of funds, the amount must be in multiples of S$1,000.
You decide on which type of applications (competitive or non-competitive) you want to submit.
For cash and SRS applications, the full investment amount would be deducted from your bank and SRS accounts respectively upon applications.
For CPF applications, only the discounted capital (i.e. capital minus interest) would be deducted from your CPFIA for successful bidders after allotment is confirmed.
How is the Allotment Done for Non-Competitive Applications?
After the application is closed, non-competitive bids would be allotted first, and the allotment is capped at 40% of the total amount offered. If the total amount of non-competitive bids is within the 40% allotment cap, all non-competitive applicants would receive full allotment.
However, if there is an over-subscription, the applicants would receive partial allotment on a pro-rated basis:
Allotment Ratio = Total Amount Allotted / Total Amount Applied
To ensure that the final allotments are in denominations of S$1,000, there would be random adjustments to the allotment. This means there is a possibility that some small bidders (e.g. S$1,000) might not get any allotment.
How is the Allotment Done for Competitive Applications?
After the non-competitive applications are settled, all the competitive applications would be arranged in ascending yield order (i.e. from the lowest to highest yields). The amount applied for each yield are accumulated starting from the lowest yield, and when the cumulative amount exceeds the amount offered to competitive applications (which is total amount offered minus amount allotted to non-competitive applications), that would be the cut-off yield.
The allotment for the competitive applications are done in the following manner:
Those who bid lower yield than the cut-off yield would get full allotment.
Those who bid exactly at the cut-off yield would get pro-rated allotment, i.e. the balance amount offered to the applicants at cut-off yield would be distributed in proportion to the amount they applied.
Those who bid higher yield than the cut-off yield would get nothing.
Again, random adjustments are done to ensure the final allotments are in multiples of S$1,000.
% of Competitive Amount Allotted at Cut-off = Approximately 64%
Cut-off Yield = 4% p.a.
Cut-off Price = S$98.005
Median Yield = 3.5% p.a.
Median Price = S$98.255
Average Yield = 2.87% p.a.
Average Price = S$98.569
How does Random Adjustment to Allotment Work?
This BS22122Z auction is the first time in T-bill history that the non-competitive applications are over-subscribed, resulting in a 49.68% allotment ratio. This is where I learnt about random adjustment to ensure the final allotments are in multiples of S$1,000.
For example, if you submit a non-competitive application of S$100,000, the allotment would be S$100,000 x 49.68% = S$49,680. To ensure the final allotment is in multiples of S$1,000, the system would randomly round up or round down your allotment to S$50,000 or S$49,000.
For non-competitive applications with small investment amount like S$1,000, the random round up or round down adjustment would land you in either full allotment (S$1,000) or no allotment.
What is the Cut-Off Price?
T-bill doesn’t pay interest, instead gives a discount upfront to achieve the cut-off yield. The cut-off price is the discounted capital (i.e. capital minus interest) you pay for one unit of T-bill, and is calculated from cut-off yield based on the following steps:
Face Value = $100
Cut-off Yield = 4% p.a.
Term to Maturity = 182 days
Pro-rated Interest = $100 x 4% x 182 / 365 = $1.995
Cut-off Price = $100 – $1.995 = $98.005
For an allotted amount of $10,000, the successful applicant would receive $199.50 interest as a discount upfront, and also receive 100 units of the T-bills on the issue date with a net payment of $9,800.50.
Where to Find the Term to Maturity?
Take note that the calculation of pro-rated interest for 6-month T-bill is not based on half of the per annum yield, but it is based on a granularity in days. One can count the number of days from issue date to maturity date, but I found a way to get the Term to Maturity using the statistics search tools on MAS website: https://eservices.mas.gov.sg/statistics/fdanet/BondTreasuryBillsCMTBsAuctions.aspx
Just key in the Issue Code and check the data you want. Term to Maturity at Auction is the information we are looking for. You can either click the DISPLAY button to show the information on the browser, or click the DOWNLOAD button to get a Command-Separated Values (CSV) file that can be opened with Microsoft Excel.
The search results show that BS22122Z has a Term to Maturity of 182 days. If you search all the T-bills in 2022, the Term to Maturity for most of the 6-month T-bills are 182 days, with a couple at 181 days (e.g. BS22115F), and the 1-year T-bills are all 364 days.
What are the Median and Average Yields?
Median and average yields are different statistical measurements of central tendency. They are just FYI statistics provided to give a hint of the bidding distribution pattern, and they have no significance in the allotment.
The median yield is the middle yield in the ascending list of successful competitive bids. If the list has an odd amount of bids, the median yield is the yield right at the middle. If the list has an even number of bids, the median yield is the average of the middle pair.
The average yield is the sum product of the amount of successful competitive bids and the respective bid yields, divided by the total amount of successful competitive bids.
[Updates on 26 December 2023] When I first wrote this post, I thought the median and average yields were based on all competitive bids, but someone told me they were based on successful bids. I couldn’t find anything on MAS website to confirm this, so I left it vague by just mentioning competitive bids. Recently I noticed MAS had put information bubbles besides median and average yields, which clearly stated that they are computed based on successful competitive bids, hence the updates in the above two paragraphs.
Can Illustrate the Allotment Process by Example?
Let me use a hypothetical example to illustrate the allotment process:
In this example, the total amount offered/allotted is S$4.5 billion. Therefore, the 40% allotment cap to non-competitive applications is S$1.8 billion.
With a total S$2 billion applied for non-competitive, there is an over-subscription. The allotment ratio would be $1.8b/$2b = 90%, meaning all the non-competitive applicants would get partial allotment that is 90% of what they had applied, with random adjustments to ensure final allotments in multiples of S$1,000.
With S$1.8 billion allotted to non-competitive applications, the remaining S$2.7 billion would be allotted to competitive applications.
There are 8 competitive yield bids in this example. The yield bids are listed in ascending order, and the cumulative amount exceeds S$2.7 billion at 4.2% yield, i.e. the cut-off yield is determined to be 4.2%.
The balance amount available to the cut-off yield bidders after allotment to the lower yield bidders (cumulatively S$2.5 billion) would be $2.7b – $2.5b = S$0.2 billion. There are S$1 billion who bid at 4.2%, and the allotment ratio would be $0.2b/$1b = 20%. Hence, the 4.2% bidders would get partial allotment that is 20% of what they had applied, with random adjustments to ensure final allotments in multiples of S$1,000.
What is the Breakeven Yield for CPF Application?
Unlike Cash and SRS applications which have a negligible 0.05% p.a. opportunity cost, CPF opportunity cost is currently higher at 2.5% p.a. for OA and 4% p.a. for SA. Due to CPF interests are computed monthly based on the lowest balance of the month, you would forgo additional 1 or 2 months of CPF interests during the T-bill auction to maturity period.
For example, the T-bill issue BS22122Z is auctioned on 10 November 2022 and matures on 16 May 2023. When you succeed in getting some allotments, the discounted capital would be deducted from your CPFIA or SA soon after auction results are published, and the full face value would be returned to your CPFIA or SA on maturity. The whole auction to maturity period spans across 7 months (November 2022 to May 2023), resulting in you forgoing 7-month worth of CPF interests while earning 6-month worth of T-bill interests. That means you would need a higher T-bill cut-off yield than CPF interest rate to breakeven.
Some T-bill issues have their issue date cross over from auction month to the next month, e.g. the BS22121F issue has auction and issue dates on 27 October 2022 and 1 November 2022 respectively. This means that the auction to maturity period would span across 8 months (October 2022 to May 2023), and would need an even higher T-bill cut-off yield to breakeven.
The formula for computing the breakeven yield is given below:
With current OA and SA interest rates at 2.5% and 4% respectively, the breakeven yields for various T-bills would be:
6-month T-bill spanning 7 months applied with OA: Breakeven Yield = 2.5% x 7 / 6 = 2.92%
6-month T-bill spanning 8 months applied with OA: Breakeven Yield = 2.5% x 8 / 6 = 3.33%
6-month T-bill spanning 7 months applied with SA: Breakeven Yield = 4% x 7 / 6 = 4.67%
6-month T-bill spanning 8 months applied with SA: Breakeven Yield = 4% x 8 / 6 = 5.33%
12-month T-bill spanning 13 months applied with OA: Breakeven Yield = 2.5% x 13 / 12 = 2.71%
12-month T-bill spanning 13 months applied with SA: Breakeven Yield = 4% x 13 / 12 = 4.33%
What are the Considerations for CPF Application?
A few things to consider for CPF applications:
You would want to choose those T-bills with auction to maturity period that spans across only 1 additional month over the tenor in order to minimize the number of months with forgone CPF interests.
You would want to choose those T-bills with auction and issue dates located near the middle of the month in order to give ample times for debit and credit to occur within the auction month and maturity month respectively.
For CPFIS-OA application, the face value is returned to your CPFIA, not to your OA. You have to manually transfer the money in your CPFIA to OA within the maturity month through the internet banking portal of your CPFIS agent bank, or else you would end up forgoing more months of OA interests. You can set alarm on your mobile phone to remind you of this transfer on maturity month.
Since there is a breakeven yield to compensate for the forgone CPF interests, you should submit a competitive bid with a yield premium above the breakeven yield. You decide what is the acceptable yield premium to make it worth your effort of visiting the bank branch in person and spending your precious time waiting in line for application processing.
You should invest a sizeable amount for a decent gain in absolute dollars. Do realize that an 1% yield premium with S$10,000 investment on a 6-month T-bill is only going to give you a gain of about S$50 ($10,000 x 1% x 182 / 365 = S$49.86).
How to Confirm the Allotment Status?
There are several ways to confirm the allotment status of your T-bill applications:
Based on the published auction results, you can work out the allotment amount, the upfront discount amount and the discounted capital for your application. You can tally these numbers with the refund amount in your CDP-linked bank account for cash application, the refund amount in your SRS account for SRS application, or the debit amount in your CPFIA or SA for CPF application.
Some banks would notify you through SMS or email on the status of your application.
After the issue date, check your CDP account, SRS account, CPFIA or SA for cash, SRS, CPFIS-OA or SA application respectively. The allotted T-bill would appear in these accounts in the form of units (e.g. 100 units for S$100,000 investment amount).
Disclaimer: This post is just for educational sharing purposes. Please do your own due diligence on any products mentioned in this post.
When I published my blog post “Guide to CPF SA Shielding” in January 2022, I presented the selection criteria for SA Shielding would be using instruments that are low risk, low cost, low volatility and high liquidity. Among the CPFIS SA approved investment products, the money market funds and short term bond funds would meet all the four criteria. Specifically, I picked the Nikko AM Shenton Short Term Bond Fund for its lowest FSMOne Risk Rating and lowest Annual Expense Ratio.
With the current increasing interest rates environment, there is another instrument that is becoming a potential candidate for SA Shielding: the 6-month Treasury Bills (T-Bills) issued by Monetary Authority of Singapore (MAS). We would take a look at T-bills as a SA Shielding instrument and compare it with the short term bond fund in this post.
What are T-Bills?
As described on MAS website, T-Bills are short term Singapore Government Securities (SGS) issued at a discount to their face value and they give investors the full face value at maturity.
Here are the key details of T-bills:
As it is backed by the Singapore Government, T-bills can be considered a risk-free instruments. There are 2 tenors, 6 months or 1 year. This relatively short tenor makes it worth considering for SA Shielding as we would not be missing too many months of SA interests while our money is parked in T-bills.
The interest rate is determined by auction, and the interest is paid as a discount upfront to successful applicants after auction results are out. The full face value of T-bill, which is at $100, is returned to investors at maturity.
We can see that the details of this T-bill issue was announced on 22 September 2022 with an auction scheduled on 29 September 2022. Once an auction is announced, retail investors can submit applications for the T-bill through the primary dealers, namely the 3 local banks (DBS, OCBC or UOB).
Retail investors can apply for T-bills using cash, SRS or CPF:
For cash application, you will need a bank account with one of the 3 local banks (as primary dealers), and also an individual CDP account with Direct Crediting Services (DCS) activated. Application can be done through the banks’ ATMs and internet banking portals.
For SRS application, you will need a SRS account with one of the 3 local banks (as SRS operators). Application can be done through the banks’ internet banking portals.
For CPF application using OA, you will need a CPF Investment Account (CPFIA) with one of the 3 local banks (DBS, OCBC or UOB) and application can only be done in person at any branch of your CPFIA agent bank.
For CPF application using SA, CPFIA is not needed, but you will need a Debt Securities Account with one of the 3 local banks (DBS, OCBC or UOB). Application can only be done in person at any branch of the banks.
While the T-bills application cut-off time is by noon on auction day, the banks may close the applications deadline 1 to 2 business days before the auction. It is advisable that you check with your bank for the exact cut-off time.
After the auction results are released about 1 hour after the cut-off time, those who succeed in getting allotment would receive the T-bill on 4 October 2022, and they would receive the face value at maturity 6 months later on 4 April 2023.
Here are the auction terms for this T-bill:
The total amount offered in this auction is $4 billion. The minimum denomination is $1,000, meaning the minimum amount to apply for T-bills is $1,000 and the amount has to be in multiples of $1,000. There is a cap of $1 million per auction, but no limit in term of total T-bills investment amount you can accumulate over multiple tranches.
The auction is conducted based on uniform price auction, meaning once the cut-off yield is determined after the auction, those who bid at the cut-off yield or lower will get allotment.
There are 2 types of applications: competitive and non-competitive. Competitive applicants would submit bids (yes, they can submit multiple bids) indicating the minimum yields they are willing to accept, whereas non-competitive applicants do not participate in the bidding process and they would get allotment at whatever cut-off yield is determined by the auction.
T-Bill Auction Process
After the auction is closed, non-competitive bids would be allotted first, up to 40% of the total amount offered. For this T-bill, the total amount offered is $4 billion, 40% would be $1.6 billion. If the total amount of non-competitive bids doesn’t exceed $1.6 billion, all non-competitive applicants would receive full allotment. Otherwise, they would be allotted on a pro-rated basis.
For example, if total amount of non-competitive bids is $2 billion, each applicant would receive 1.6/2 = 80% allotment of the amount they applied.
Non-competitive applicants will get the allotted T-bill at the cut-off yield, which is determined by the competitive bids.
After the non-competitive applications are settled, all the competitive applications would be arranged in ascending yield order (i.e. from the lowest to highest yields). The amount applied for each yield are accumulated starting from the lowest yield, and when the cumulative amount exceeds the amount offered to competitive applications (which is total amount offered minus amount allotted to non-competitive applications), that would be the cut-off yield.
In terms of allotment:
Those who bid lower yield than the cut-off yield would get full allotment.
Those who bid exactly at the cut-off yield would get pro-rated allotment, i.e. the balance amount offered to the applicants at cut-off yield would be distributed in proportion to the amount they applied.
Those who bid higher yield than the cut-off yield would get nothing.
Lets take a look at the auction results of this T-bill:
In this example, total amount allotted is $4 billion (which is the same as total amount offered indicated in the auction announcement) and total amount applied is $9.7 billion. There is an over-subscription, which is shown by the bid-to-cover ratio, calculated as total amount applied divided by total amount allotted = 9.7/4 = 2.42.
The total amount allotted to the non-competitive applications is $1.2 billion, which is less than 40% of total amount offered. Hence, they get 100% allotment of the T-bills at the cut-off yield of 3.32% p.a.
With $1.2 billion allotted to non-competitive applications, the remaining $2.8 billion is allotted to competitive applications. The results show that the allotment to those who bid at the cut-off yield is approximately 8%.
The cut-off price is the net amount paid for the T-bill after receiving the interest in the form of upfront discount. The cut-off price in the auction results is calculated in the following steps:
Face Value = $100
Cut-off Yield = 3.32% p.a.
Term to Maturity = 182 days
Pro-rated Interest = $100 x 3.32% x 182 / 365 = $1.655
Cut-off Price = $100 – $1.655 = $98.345
If the applicant applies for $10,000, it means the successful applicant would receive $165.50 interest as a discount after auction results are out, and also receive 100 units of the T-bills on the issue date.
The median yield is the middle yield in the ascending list of successful competitive bids. If the list has an odd amount of bids, the median yield is the yield right at the middle. If the list has an even number of bids, the median yield is the average of the middle pair.
The average yield is the sum product of the amount of successful competitive bids and the respective bid yields, divided by the total amount of successful competitive bids.
[Updates on 18 December 2023] When I first wrote this post, I thought the median and average yields were based on all competitive bids, but someone told me they were based on successful bids. I couldn’t find anything on MAS website to confirm this, so I left it vague by just mentioning competitive bids. Recently I noticed MAS had put information bubbles besides median and average yields, which clearly stated that they are computed based on successful competitive bids, hence the updates in the above two paragraphs.
The 6-month T-bills are issued fortnightly and 12-month T-bills quarterly. There are many opportunities to use T-bills for SA Shielding. Lets just focus on the shorter 6-month tenor.
The period for the CPF SA money used to hold the 6-month T-bill can span 7 to 8 months. During the holding period from application (carry out between announcement and auction dates) to maturity, you would miss the pro-rated monthly SA interests for the amount parked in the T-bill. Hence, you would want to choose those T-bills with 7-month span for SA Shielding.
For example, the 6-month T-bill issue BS22119T we looked at has its application month in September 2022 and maturity month in April 2023, i.e. it spans over 8 months. This happens because the issue date has crossed from auction month to the next month.
To reduce the holding period to 7 months, it is advisable to choose those 6-month T-bills with all the announcement, auction and issue dates in the same month.
In addition, to ensure SA money is deducted and credited in the first month and the seventh month respectively, you would prefer the period between auction and issue dates that are located in the middle of the month, giving ample times for debit and credit to happen within the month before auction and after maturity respectively.
Refer to the issuance calendar, the few upcoming issues that satisfy the above consideration would be BS22120E, BS22122Z, BS22124H.
Of course, the obvious selection criteria for the appropriate T-bills are that your 55th birthday would fall between the auction/debit date and maturity/credit date for SA Shielding purpose.
T-Bill Breakeven Yield for SA Shielding
In order to recover the 7-month SA interests for the amount parked in the 6-month T-bill, the cut-off yield of the T-bill has to be higher than the SA interest rates.
With the current SA interest rate at 4% p.a., the cut-off yield of the T-bill would have to be 4% x 7/6, which is 4.67% p.a. in order to breakeven. This is more than 1% higher than the latest 3.32% p.a. cut-off yield. Will it happen?
We can see that the cut-off yields had been on an uptrend since the beginning of the year. It took approximately 3 months to raise the yield by 1%. If the current trend continues, we might come close to the breakeven cut-off yield by end of the year.
Alternatively, I have done a linear trendline projection on the yield graph using Microsoft Excel:
Indeed the projection shows that the cut-off yield might reach about 4.5% p.a. by year end, and could exceed breakeven yield by early next year. With the US Federal Reserve continues to raise its key rate aggressively, such possibility is not unthinkable.
Preparation for SA Shielding using T-Bills
As application of T-bill using CPF has to be done in person at any branch of your bank, I would suggest you visit the bank before doing SA Shielding to make sure you meet all the prerequisites for T-bill application using SA money.
Find out from your bank about their T-bill application process, their exact application cut-off time, their charges, how would they inform you about the allotment, the time taken to refund the capital or discount upon allotment and the face value upon maturity if successfully allotted.
Strategy for SA Shielding using T-Bills
Create a list of 6-month T-bills with auction and maturity dates that span across your 55th birthday, as well as the auction-to-issue period located in the middle of the same month.
Compute the breakeven cut-off yield from the current SA interest rate.
Monitor the T-bill cut-off yields to get a feel of how the trend is developing and how close it gets to the breakeven yield.
Ideally it would be good to get the breakeven cut-off yield, but you may decide to accept a lower yield and view the yield loss as part of the cost of SA Shielding. After all, this yield loss can be recovered by the +1.5% boost in interest rate due to SA Shielding.
Depending on your yield target and the T-bill yield trend, you can choose to start applying for any T-bill in the list you created. The later the T-bill you choose, the more SA amount you can shield if it continues to increase due to Mandatory Contribution (MC) and Voluntary Contribution (VC).
However, don’t wait till the last T-bill tranche issued just before your birthday. There is a possibility that you don’t get full allotment from the issue, and you won’t have any opportunity to shield your balance amount using T-bill anymore.
When you apply for the selected T-bill, you just simply submit competitive bid at your target yield. If you get full allotment, you are done with SA Shielding. If you get partial allotment, you continue to apply the balance amount in subsequent issues, until you fully shield your intended amount.
Some may like to fine tune this strategy by starting initial application with competitive bid at the breakeven yield, and progressively lower your competitive bid towards your target yield in subsequent applications to increase the chance of getting allotment.
You may consider moving to non-competitive bid towards the tail end to secure allotment, but run the risk of the cut-off yield might be lower than your target yield.
Short Term Bond Fund Risk Analysis
Before comparing SA Shielding using short term bond fund and T-bill, let me update my risk analysis on the Nikko AM Shenton Short Term Bond Fund with the latest historical prices (downloaded from Yahoo Finance with data up to 30 September 2022) and additional statistical measures:
With additional 9 months of price data, the largest loss remains at -0.98% on 25 March 2020. It suggests the largest loss is an outlier that rarely happened in history. Therefore, I have added a few statistical measures for a better risk analysis.
The average 5-day move is 0.03% and the Standard Deviation (SD) is 0.10%. Statistically it means we would suffer loss at 2 and 3 SD levels with 2.3% and 0.1% probability respectively.
The conservative 3 SD loss is -0.28% for this short term bond fund. Coupled with potential loss of up to 2 months of SA interests (4% x 2 / 12 = 0.67%), total cost of SA Shielding might be up to -0.95%, and lets round it up to -1%, recoverable by 8 months of additional 1.5% interests.
Do take note that for those whose birthday doesn’t fall near the beginning or the end of the month, the whole SA debit to credit cycle would happen within the same month. They would only miss 1 month of SA interests (4% / 12 = 0.33%), together with 3 SD loss could bring the cost up to -0.61%. This could easily be recovered by additional 1.5% interests in 5 months time.
Short Term Bond Fund vs T-Bill for SA Shielding
Here is a summary of considerations for SA Shielding using Short Term Bond Fund vs T-Bill:
Short Term Bond Fund
SA Shielding using short term bond fund could be quite a daunting process for someone who is new to unit trust investment. One would need to go through the process of opening a trading account, obtaining the necessary qualification and getting familiar with the trading platform just to prepare for SA Shielding.
In order to reduce volatility risk, the execution window could be as short as 5 business days. One would need to watch the timing closely, place the buy order early enough for the Shield Amount to be deducted from SA before 55th birthday and execute the sell order as soon as RA is formed at 55th birthday.
My risk analysis already shown that the cost of SA Shielding using short term bond fund could be up to -1% based on statistical analysis, but human emotions could kick in if the bond fund suffers losses at the point where one is supposed to execute the sell order. Such loss aversion might trigger a delay in placing the sell order, hoping that price would recover soon. This inevitably widen the holding window and increase the exposure to possibly larger loss.
One would need emotional stillness to execute the buy and sell orders without hesitation for SA Shielding to be effective. Short term bond fund would be a convenient instrument for SA Shielding because it could be traded through the online portal of the trading platform. And it is reasonably safe as short term bond funds are relatively non-volatile.
T-Bill
On the other hand, SA Shielding using T-bill could be a relatively simple process. Besides the inconvenience of having to visit the primary dealer bank in person and filling up the form to apply for T-bill, the bank would take care of submitting the application form, deducting money from SA, settling refund of capital or discount after auction, holding allotted T-bill in custody, and returning T-bill face value to SA at maturity.
The only thing to do on the applicant part is to select which tranche of T-bill to apply and decide on the competitive bid to apply. With an execution window of 6 months, there are plenty of T-bill tranches to choose from. As for the competitive bid, one can set a yield target from analyzing the cut-off trend and deciding on the acceptable cost of SA Shielding by subtracting the breakeven yield from the target yield.
T-bill is issued by MAS and backed by Singapore Government. It can be considered a risk free investment with capital and yield guarantee.
Summary
When I first wrote about SA Shielding, T-bill cut-off yield was under 0.5%, way too low a yield to compensate for missing 7-month of SA 4% interests then. With the recent increasing trend of cut-off yield, T-bill is becoming a viable option for SA Shielding.
T-bill is appealing to risk averse people, particularly those who are not comfortable with unit trust investment. Once settled the target yield to apply for, the cost of SA Shielding can be computed and known. They can rest their mind and let the bank handles all the administrative details.
Both short term bond fund and T-bill are fixed income instruments. When used for SA Shielding, the former is actively managed by yourself and the latter is passively managed as it is left to be managed by the bank. Ultimately, you need to choose the appropriate instrument based on your personality, risk tolerance and investment experience.
I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.
There are a few schemes where the government is putting money directly or indirectly into your CPF Accounts when you are young.
After that, your parents can deposit money in your CDA, and there would be dollar-for-dollar Government Co-Matching for each dollar deposited, up to the stipulated caps according to your birth order:
Post-Secondary Education Account (PSEA)
When you turn 12 years old, your CDA would be closed and any unused CDA balance would be transferred to another account known as Post-Secondary Education Account (PSEA): https://www.moe.gov.sg/financial-matters/psea
The PSEA balance will earn interest pegged to the CPF OA, which is currently 2.5% p.a., but the extra 1% interest on the first $20,000 in the CPF OA will not apply to the PSEA.
When you turn 31 years old, your PSEA would be closed and any unused PSEA balance would be transferred to your CPF OA.
Personal Wealth Life Cycle Management (PWLCM) 