Implementation of CPF SA Shielding Hack using FSMOne.com

I chanced upon Christopher Ng’s blog post below and it got me thinking. Frankly, it is the post’s title that first caught my attention (key word: Abomination… what a strong word to use). BTW, you might want to read the comment section in his blog post. Many others have given their views as well.

CPF Shielding Lifehack is an Abomination that must be ended by the CPF Board (read here)

To quote his post: “The difference in returns is non-trivial, suppose the Enhanced Retirement Sum when you retire is $280,000, hacking the difference of 1.5% interest will net you about $4,200 every year.”

Basically, I have yet to turn 55 years old. The rules might have changed by the time I am nearing 55 years old.

I have been reading about the CPF Shielding Hack and this post is to share what I have found out. The key point of this post is about how to implement the hack; a step by step guide. After all, many others have talked about the concept of it. In addition, unlike Christopher Ng’s blog post, this post is not about how this hack shows that there is a failure in policy-making…. What the heck??!! (pun intended 😄)

CPF Special Account (SA) Shielding: How You Can Perform This Retirement ‘Cheat Code’ (read here)

CPF SA Shielding and OA Shielding — A Live Example (read here)

What Is The CPF SA Shielding Hack?

To understand CPF SA Shielding, you first have to understand the CPF Retirement Account (RA). 

Ah yes – Retirement… I am sure many would wish to have more money to spend during their retirement years.

“The question isn’t at what age I want to retire, it’s at what income.” -George Foreman

As its name suggests, your CPF RA is meant for your retirement, where your retirement sum will provide you with monthly payouts during your golden years. 

When we turn 55, a new Retirement Account (RA) is created for us. Up to our Full Retirement Sum (FRS) will be transferred from our Special Account and Ordinary Account into the Retirement Account.

The first pool of monies to flow into our Retirement Account will be from our Special Account. This is because the balances in our Special Account has always been set aside for our retirement purposes.  If we are unable to hit the FRS, then our Ordinary Account balances will flow in to plug the gap.

The Full Retirement Sum (FRS) for 2021 is $186,000. See below.

If we do not want our CPF SA balances, or even our OA balances, to be transferred into the Retirement Account, we can use the CPF Shielding Hack to “shield” these balances.

The Special Account Shielding Hack

The main issue some people have with the way our Retirement Account (RA) is filled up is that our Special Account balances, which earn 4.0% per annum, flows into it first. Meanwhile, our Ordinary Account (OA) balances, earning 2.5% per annum, is only transferred in after that.

Hence, someone financially savvy would try to maximise the interest earned in their CPF accounts, by having their CPF RA formed largely by CPF OA (which earns lower interest) rather than CPF SA. This way, we optimise the amount of interest we earn on our CPF balances. Do also keep in mind that you cannot make transfers from your CPF OA to your CPF SA after you turn 55. 

The aim is to have more of your CPF money earning 4% p.a., rather than 2.5% p.a. 

To shield our Special Account balances, we typically have to correctly time an investment into a low-cost and liquid fund offered on the CPF Investment Scheme (CPFIS). Remember, we’re only trying to shield the amount, not trying to beat the 4.0% interest on our Special Account. After our 55^th birthday, we’re going to divest it and see the entire amount flow back into our CPF Special Account.

When doing so, we can only invest anything beyond $40,000 in our Special Account – which means at least $40,000 of our Special Account balances will be transferred into our Retirement Account.

Implementation

So yes, the above is the concept side of it. The key question here, is how to implement it?

For some people, they have never invested the monies within their CPF OA/SA account. Given the low interest rate environment we are in (for a long time), and the risks involved with other investment products, many people actually treat these CPF accounts as a kind of risk-free bond in their portfolio (me included).

Returns for the CPF-OA account and CPF-SA account are 2.5% per annum and 4.0% per annum respectively. Not bad considering the April issue of the Singapore Savings Bonds provide a yield of 1.15% per annum over a 10 year period, while the oversubscribed Astrea VI Class A-1 bonds offer a yield of 3% per annum assuming they are called after 5 years.

So many would be wondering what they should do, and what should they invest in just before they turn 55 years old. This becomes more pertinent when they are nearing that age. After all, they have never invested their CPF monies, beside depositing money into their CPF accounts (or their spouse’s CPF account or aged parents’ CPF accounts), or transferring monies from their CPF OA accounts to their CPF SA accounts.

Beside thinking about when and what to buy, it is also good to think about how to go about doing it.

It would be worthwhile to compare brokerage costs. For POEMS, Dollardexs and FSMOne-Fundsupermart for example, the net sales charge or commission is zero.

For me, I would turn to FSMOne.com. If you do not have an account, I suggest you sign up for one. Would appreciate if you use my FSMOne referral code: P0031127, when you sign up.

FSMOne.com, previously known as Fundsupermart (“FSM”), is the Business-to-Consumer (B2C) division of iFAST Financial Pte Ltd (“iFAST Singapore”), the Singapore subsidiary of SGX-ST Mainboard-listed iFAST Corporation Ltd.

After you have signed up and logged in, you need to update your CPFIS (CPF Investment Scheme Account) details in the ‘Account Settings’. See below.

If you do not have a CPF Investment Account, just sign for one through one of the local banks.

Open a CPF Investment Account with DBS/POSB (Click here)

OCBC CPF Investment Account (Click here)

UOB CPF Investment Account (Click here)

Once you have logged in to FSMOne.com, go to ‘Place order’ in the top ribbon. See below.

Click on ‘Select a Fund’. See below.

So as mentioned earlier, what are the low-cost and liquid funds offered on the CPF Investment Scheme (CPFIS) that we should be looking for?

Here is the full list provided by CPF. To help you narrow down your search, look out for unit trusts with low to medium risk. Unsurprisingly, you’ll find that the options provided are the bond (fixed income) funds, such as: 

• Eastspring Investments Unit Trusts – Singapore Select Bond Fund Class A (Expense ratio: 0.63%)
• LionGlobal Short Duration Bond Fund Class A (SGD) (Dist) (Expense ratio: 0.57%)
• Nikko AM Shenton Short Term Bond Funds (Expense ratio: 0.39%)
• Schroder Singapore Fixed Income Fund Class A (Expense ratio: 0.69%)
• United SGD Fund – Class A (ACC) SGD (Expense ratio: 0.68%)

Note: I have obtained the annual expense ratios from FSMOne.com.

I personally would look at SGD short duration bonds, namely Nikko AM Shenton Short Term Bond SGD and LionGlobal Short Duration Bond Cl A Dis SGD. They also have the lower expense ratios.

After you have selected the fund, go down the pay, click ‘Buy’, select payment via ‘CPFIS-SA’, and key in your investment amount. See below.

The minimum amount to invest for Nikko AM Shenton Short Term Bond SGD is SGD 500, while the minimum amount to invest for LionGlobal Short Duration Bond Cl A Dis SGD is SGD 1,000.

However, do note that you will have to set aside $20,000 in your CPF Ordinary Account and $40,000 in your CPF Special Account respectively before the excess savings can be used for investments. If you do not fulfill these requirements, CPF Board will reject any withdrawal requests for your CPF investments.

Then click on the box in Disclaimer & Verification, key in your password, and ‘Next’.

Why Short Duration Bonds?

This because you do not want your hard earned money (from your CPF SA account) to be affected by interest rate news which are beyond our control. In addition, at the same time you want to invest in high quality, low risk assets.

Also, as mentioned earlier, the above mentioned 2 fund have relatively lower expense ratios.

However, I like to emphasize: Low risk does not mean no risk. Yes timing is crucial, however, the prices of the bonds can still drop for various reasons (you can also refer to the charts as shown below).

As you can see below, Nikko AM Shenton Short Term Bond SGD has a FSM risk rating of only 1 (the lowest risk) while LionGlobal Short Duration Bond Cl A Dis SGD has a FSM risk rating of only 2 (still very low risk).

As stated within Nikko AM Shenton Short Term Bond SGD factsheet, the investment objective of the Fund is to seek preservation of capital and liquidity and consistent with this objective, to outperform the Singapore Interbank Offered Rate (SIBOR) by investing in a diversified portfolio of good quality, short-term bonds and money market instruments. See below for the fund’s top holdings.

As stated within LionGlobal Short Duration Bond Cl A Dis SGD , the investment objective of the Fund is to provide total return of capital growth and income over the medium to long term, through an actively managed portfolio of Singapore and international bonds, high quality interest rate securities and other related securities. See below for the fund’s top holdings.

In addition, over a 3 year period, the price trend of these two bonds have been trending up, with little volatility. See below.

However, the one year return of around 2+ to 3+% per annum of these bonds would not be as juicy as the 4% per annum of your CPF Special Account balances. So remember to sell out these funds after the full Retirement Sum is transferred from your Special Account and Ordinary Account. This will return the money back into your CPF SA account to earn the minimum 4% per annum interest.

The longer the monies stay in the bond funds, the more you lose out in terms of interest as compared to parking the monies in the CPF Special Account.

To sell, log in to FSMOne.com, go to ‘Place order’ in the top ribbon. See below.

Then click the below and select your fund to sell.

Voila! There you have it folks!

With these few steps which probably took a few minutes (excluding the time taken to approve the account sign-up), and depending on how much you have in your CPF-SA, this could mean a few extra thousand dollars a year after you turn 55 years old.

In fact, I struggle to find valid good reason why not to do the hack, unless you have lots of money and the extra money per year is too meagre to be worth the effort…. yes that is possible (good for you too), and who knows what will happen tomorrow or next year… After all, planning is important but the most important part of every plan is to plan on the plan not going according to plan..hahahaha (To quote Morgan Housel author of the book “The Psychology of Money”).

In conclusion

Among the two (Nikko AM Shenton Short Term Bond SGD and LionGlobal Short Duration Bond Cl A Dis SGD), given the lower expense ratio and FSM risk rating of only 1, I reckon most people would choose Nikko AM Shenton Short Term Bond SGD.

So that is the process for shielding the amount beyond $40,000 in your CPF Special account.

The remaining savings in your Special and Ordinary Accounts, after setting aside the retirement sum in your Retirement Account, can be withdrawn anytime from age 55. While withdrawal is an option open to you, you could consider stretching the value of your CPF savings by keeping them in your CPF accounts. You can also make regular top-ups to your CPF accounts to further boost your retirement savings. With attractive interest of up to 6% per annum, your CPF savings will grow over time so you have more in your golden years.

Below are minor points shared by one of the reader which I think is useful to know:
(1) Amount we can transfer to RA is ERS (1.5x of FRS). But I think it is not a good idea as CPF Life accounts does not earn interest and this insurance is costly.
(2) Double Shield (SA and OA) may be interesting for some people. Basically invest in CPF SA and CPF OA and then use Cash to top up RA.
(3) Interest calculation by CPF is based on minimum balance of the month. So further optimization is possible/needed.
(4) When we make CPF withdrawal from 55, the 1st bucket to draw down is SA. We need another chance to force withdrawal from OA.

That’s all for now. Just sharing my thoughts by the way. This is not an investment advice. Please do your own due diligence.

Do let me know your comments below.

“As in all successful ventures, the foundation of a good retirement is planning.” – Earl Nightingale

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