Should You Use Your CPF Funds to Buy T-Bills or Fixed Deposits?
Latest T-Bills Auction (2 February 2023): 3.88% p.a.
CPF-OA Interest Rate: 2.5% p.a.
An additional 1.38% p.a. risk-free interest? It’s a no-brainer to invest!
BUT WAIT!
It’s not as simple as you might think.
So, here’s what you need to consider before using your CPF funds to invest in T-bills (or fixed deposits) and how to do it too!
TL;DR: Using CPF Funds to Invest in T-bills Or Fixed Deposits — All You Need to Know
If you fulfill the requirements and have opened your CPF Investment Account (CPFIA), T-bills are currently a good way to invest your CPF-OA funds provided you can lock it up for the full duration of the tenor (typically 6 months). This is because T-bill interest rates are now above CPF-OA interest rates:
| Recommended cut-off yields of T-bills (assuming a 1-month time lag) | ||
|---|---|---|
| Minimum cut-off yield to use OA to invest | Minimum cut-off yield to use SA to invest | |
| 6-month | 2.92% p.a. | 4.67% p.a. |
| 1-year | 2.71% p.a. | 4.33% p.a. |
Source: DBS, The Straits Times Graphics
| Recommended cut-off yields of T-bills (assuming a 2-month time lag) | ||
|---|---|---|
| Minimum cut-off yield to use OA to invest | Minimum cut-off yield to use SA to invest | |
| 6-month | 3.33% p.a. | 5.33% p.a. |
| 1-year | 2.92% p.a. | 4.67% p.a. |
Source: DBS, The Straits Times Graphics
However, T-bill interest rates are not known in advance and you may not get all your funds successfully allocated.
If you want guaranteed interest and full allocation, along with liquidity and flexibility, fixed deposits will be a better choice.
Jump to:
- Should You Invest in T-bills with Your CPF Funds?
- Should You Invest in Fixed Deposits with Your CPF Funds?
- How to Invest in T-bills using CPF Funds?
- How to Invest in Fixed Deposits using CPF Funds?
- How to Withdraw T-bills/Fixed Deposits Invested with CPF Funds?
Should You Invest in T-bills with Your CPF Funds?
For the uninitiated, Treasury bills (T-bills) are government bonds that pay a fixed rate of interest and have maturities of either six months or one year, with the 6-month T-bill being the most common. If you are unfamiliar with how T-bills work, do read our ultimate guide to T-bills first before coming back to this article.
The latest 6-month T-bill is at 3.88% p.a., a 1.38% p.a. difference when we compare that to the interest rate of 2.5% that we get in our CPF Ordinary Account (CPF-OA).
However, there are a few key differences aside from just the interest rates that investors must know of before locking up their money in T-bills.
You Will Lose Out On Interest In Your CPF-OA
Whenever you make an investment using funds in your CPF-OA, the interest computation will be affected.
According to CPF:
CPF interest is computed monthly. It is credited to your respective accounts by 1 January of the following year and compounded annually.
CPF balances used for interest computation are affected by the transactions in your account. For instance, contributions (including refunds) received this month start earning interest next month. Withdrawals/deductions in this month will not earn interest from this month onwards.
In other words, you will not get any interest during the month that you apply for T-bills AND the month when you get back the money once your T-bills mature.
Hence, you may lose up to two months’ worth of CPF interest depending on when you apply for T-bills.
This means that the T-bill interest that you receive will need to be high enough to offset any CPF interest lost.
Breakeven Interest Rates
Thankfully, DBS has already calculated the breakeven interest rates for us:
| Recommended cut-off yields of T-bills (assuming a 1-month time lag) | ||
|---|---|---|
| Minimum cut-off yield to use OA to invest | Minimum cut-off yield to use SA to invest | |
| 6-month | 2.92% p.a. | 4.67% p.a. |
| 1-year | 2.71% p.a. | 4.33% p.a. |
Source: DBS, The Straits Times Graphics
| Recommended cut-off yields of T-bills (assuming a 2-month time lag) | ||
|---|---|---|
| Minimum cut-off yield to use OA to invest | Minimum cut-off yield to use SA to invest | |
| 6-month | 3.33% p.a. | 5.33% p.a. |
| 1-year | 2.92% p.a. | 4.67% p.a. |
Source: DBS, The Straits Times Graphics
That said, you’ll also need to factor in the fees ($6.50) required to invest in T-bills with your CPF funds.
How Much Would You Have Made If You Invested in the Latest T-bill?
The latest 6-month T-bill boasts 3.88% p.a. with a 100% allocation. It also has an issue date on 7 February 2023 and a maturity date on 8 August 2023.
Assuming that we have $10,000 to invest and that you only lose one month’s worth of interest, here’s how much more we would make:
| Interest earned on CPF-OA | Interest earned on T-bills | |
|---|---|---|
| Feb 2023 | $20.83 | $194 - $6.50 fees = $187.50 upfront |
| Mar 2023 | $20.83 | |
| Apr 2023 | $20.83 | |
| May 2023 | $20.83 | |
| Jun 2023 | $20.83 | |
| Jul 2023 | $20.83 | |
| Aug 2023 | $20.83 | |
| Total | $145.81 | $187.50 upfront |
Based on the calculations, you would be earning $41.69 more in interest.
But Interest Rates and Allocations Are NOT Guaranteed!
As T-bills have their interest rates determined by auctions, there’s no guarantee that the next T-bill interest rate will be well above the recommended breakeven interests.
Moreover, if T-bills are oversubscribed again like the one auctioned on 24 November 2022, you may not see the full allocation of your funds.
Lastly, CPF interest rates could go up to 3.5%, although it is unlikely in the near future.
Should You Invest in T-bills Now With CPF Funds?
With T-bills still high and benchmark yields still above the recommended breakeven interests, it is a good time to invest your CPF-OA funds.
However, you’ll also need to factor in the time you need to wait at agent banks (if you aren’t banking with DBS).
If you are investing $10,000, the opportunity cost is a meager $41.69, which might not be worth your time!
But of course, if you are investing a larger sum, it may be well worth it.
The downside to this is that you will lose out on all the CPF interest for the months that you invest in.
Be sure that you are able to lock up your CPF-OA funds for the full duration of the tenor!
As for CPF-SA funds, the interest rates have yet to hit the breakeven interest, so you would lose money if you invest with them.
So make sure to do your calculations!
Should You Invest in Fixed Deposits with Your CPF Funds?
Did you know that you can also use your CPF funds to invest in fixed deposits?
Unlike T-bills, fixed deposits have guaranteed interest, are much more liquid (you can withdraw your money in case of emergencies), and have a range of tenors to choose from.
Like T-bills, you will also lose out on CPF interest whenever you apply for a fixed deposit or receive the sum back. But thanks to its flexibility, you can apply at any time and optimise your returns so you will only lose one month’s worth of CPF interest.
To do this, you will have to apply at the start of the month to ensure that your fixed deposit will mature at the start of the month too, and avoid losing another month of CPF interest.
For fixed deposits with 6 months or one-year tenors, the breakeven interest rates are the same as that of T-bills as seen above.
How to Invest in T-bills using CPF Funds?
Do note that agent banks charge a one-time fee of $2.50 per transaction and a quarterly $2 service fee per counter. A T-bill investment using your CPF funds will hence incur a total fee of $6.50.
How to Invest in Fixed Deposits using CPF Funds?
Likewise, you can invest in fixed deposits under the CPFIS with the same requirements.
You’ll also have to go down physically to the specific agent bank (DBS/POSB, OCBC, or UOB) to place your fixed deposit. Luckily, you can place the fixed deposit even if the bank is not your CPFIS-OA agent bank.
How to Withdraw T-bills/Fixed Deposits Invested with CPF Funds?
When your T-bill or fixed deposit matures, the funds go to your CPFIA account first and will stay there for two months before being transferred to your CPF account. This means that you will lose out on CPF interest for two months if you don’t do anything!
To avoid this, you can initiate a manual transfer to your CPF account once the funds are in your CPFIA to earn interest the next month or reinvest into another T-bill or fixed deposit to compound your interest.
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product. Note that the information is accurate as of 8 February 2023.
Conclusion
Right now, investing in either T-bills or fixed deposits with your CPF funds really depends on how much you have to invest. If you are investing $10,000, you will only be earning about $41 more, which may not be worth the effort.
However, if you are investing much more than that, I’d say go for it!
With more than $10,000, fixed deposits seem to be the better option now that T-bill interest rates have dropped. But make sure you are aware of the differences between T-bills and fixed deposits.
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