The Boy who Procrastinates (TBWP)

Revision of Terms and Conditions for Maybank SaveUp Account

By The Boy Who Procrastinates - March 22, 2019

First launched in 2016, Maybank will be revising the terms and conditions on the Maybank SaveUp Account for the second time with effect from 1 April 2019. This article aims to provide an overview of the upcoming changes and whether the existing account holders stand to benefit from the revision. You may also wish to refer to the revised Terms and Conditions and FAQ for more information.

Summary of the Current Interest Rate mechanism for Maybank SaveUp Account

Before examining the upcoming revision to the Maybank SaveUp Account, it is probably beneficial to have a good understanding and recap to its current interest rate mechanism. For ease of reference, I will briefly summarize on how an account holder can earn interest with this savings account.

Base Interest: It is awarded according to the different balance tiers. Other than the minimum daily average balance of $1,000 (to avoid the fall below fee), there is no other requirement imposed to earn the base interest.

Bonus Interest: The account holder receives bonus interest based on the number of qualifying products taken up. The huge jump in the bonus interest (1.95%) comes from satisfying the 3rd prerequisite.

There are a total of 9 qualifying products. The conventional categories are the crediting of salary, GIRO transaction and credit card spending while the remaining 6 products involve loans, unit trust or insurance.

The maximum account balance that earns the bonus interest is capped at first $60,000.

Therefore, the total interest an account holder can expect to earn on the Maybank SaveUp Account is the sum of the base interest and the bonus interest.

Currently, the Maybank SaveUp Account offers the best bang for the buck among the active savings accounts, at approximately 3% for the first $60,000 balance. This is taking into assumption that the account holder is able to fulfill 3 qualifying products.

Revision of Terms and Conditions for Maybank SaveUp Account from 1 April 2019

The maximum account balance that can earn the bonus interest will be revised to the first $50,000.

This is a distasteful revision as the maximum amount of bonus interest one can earn will be scaled down considerably. Any balance above $50,000 will now earn the paltry base interest of 0.3125% only. As such, it probably does not make sense to have any amount beyond the first $50,000 in the savings account.

Meeting the requirements of either/both of the services of GIRO and Salary Crediting will now be considered as 1 Qualifying Product.

Now, this is definitely a deal-breaker! Merging the only few attainable criteria into one is most certainly an off-putting revision for most of the account holders. With the plummet of bonus interest rate from the dissatisfaction of the 3rd qualifying product, the Maybank SaveUp Account will likely lose its allure as a high-yielding savings account.

Structured Deposits will be replacing Unit Trust Regular Subscription Plan as a Qualifying Product. There is a minimum investment amount of at least $30,000 and the reward period is 3 months.

This change would probably not be affecting the masses unless you are relying on Unit Trust Subscription Plan as one of your qualifying products. In any case, it may be unwise to initiate a structured deposit placement for the sole purpose of achieving high interest on the SaveUp Account for 3 months.

All loan and life insurance will earn bonus interest for 12 months following the month of loan disbursement / policy inception.

This revision certainly spells bad news for account holders who have taken loan or purchased insurance from Maybank (e.g. mortgage/education/car/renovation loan). For existing loan/insurance arrangement, they will continue to be eligible as qualifying products until 31 March 2020. Purchasing new insurance or applying for new loan just to earn the bonus interest is definitely imprudent since these are long-term commitments.

Maybank Privilege SaveUp Programme

In addition, Maybank will be introducing the revised Maybank Privilege SaveUp Programme concurrently from 1 April 2019. The targeted group will be Maybank Privilege customers with the SaveUp Account. You may also wish to refer to the revised Terms and Conditions and FAQ for more information.

According to Maybank's website, the eligibility to become a Maybank Privilege customer is to have at least $50,000 of deposits/investments.

Similar to the regular SaveUp Account, the Privilege version offers the same base interest rate according to balance tiers and bonus interest rate based on the number of qualifying products taken up.

However, the maximum account balance that can earn the bonus interest will be revised to the first $100,000.

The other main difference lies in the details of the qualifying products. It offers 10 different categories of which 7 are related to Insurance/Investment/Loan. The remaining 3 options are as follows:

As illustrated, the salary crediting/GIRO and credit card spending would require a greater transaction amount in order to satisfy as qualifying products.

Interestingly, there is a new category to maintain an average daily balance of $200,000 per month. However, with this being a princely sum, it can come as an arduous challenge for most account holders. Furthermore, even if you have such fortune at your disposal, it begs the question: Is it worth it to deposit in the SaveUp Account?

If the Privilege SaveUp Programme does not address your needs, you may request to opt out of it and remain with the regular SaveUp Account.

Overview of the Revision

The table summarizes the 3 main areas of alteration made to the savings account. All in all, it is apparent that all these changes are unwelcome and would be detrimental to the interests of the account holders.

Personally, I find these negative changes appalling (especially the merging of GIRO transaction and salary crediting into 1 qualifying product) which may cause Maybank to lose its competitive edge and appeal in the domain of bank deposits.

For account holders who have existing loan/insurance arrangement with Maybank, they will still be able to enjoy 3% effective interest rate on the first $50,000 which is relatively substantial if you ask me. The reasonable course of action for them is to enjoy the bonus interest for a year before looking out for better alternative.

If you are not tied down by such arrangement, the steep decline in effective interest rate is probably a strong justification to start looking out for better substitute. Neither the revised SaveUp Account nor the Privilege SaveUp Programme is as rewarding as the other savings products that are being offered on the market. 1 April may be a cue to switch to a high-yielding active savings accounts or passive savings accounts.

Impact of the Revision on Interest Rate

(Click to enlarge)

Let's assume the profile of an account holder who credits his salary to the Maybank SaveUp Account, performs GIRO transaction and achieves the required credit card spending. Like most people, he does not have an existing loan/insurance arrangement and has no intention of doing so.

Graphically, it is evident that the revision of the terms and conditions for the savings account creates an unfavourable situation for this average account holder.

The revised effective interest rate has plunged approximately 1.95% as he can only fulfill 2 criteria instead of 3. From 1 April onwards, he will be reaping approximately 1.05% for the first $50,000.

If he has opted for the Privilege SaveUp Programme and increased his credit card spending and GIRO transaction, he would still be earning 1.08% on the first $100,000. Even if he has managed to accumulate $200,000 balance, the effective interest rate only peaks at a meagre 1.38%.

Comparison with other Active Savings Accounts

Following from the previous post on the comparison on active savings accounts, let's see where does Maybank SaveUp Account stand with the upcoming revision.

With a 16.67% decline in the maximum account balance for which the bonus interest is accorded, the Maybank SaveUp Account has dropped to the last place in this segment, tied with DBS Multiplier Account. Comparatively, It is lagging far behind Standard Chartered Bonus$aver Account ($100,000) and UOB One Account ($75,000).

With the dissatisfaction of the 3rd qualifying product, the effective interest rate that one can expect to earn on Maybank SaveUp Account has taken a nosedive to 1.05%, fallen far behind that of its peers on the chart.

Currently, you can get your money's worth with UOB One Account at 2.44% effective interest rate. OCBC 360 Account is the runner-up at 2.3% but with the sustainability of the Step-Up Bonus a cause for concern.

If you do not wish to miss out on any articles, you may consider following the facebook page for timely update.

Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with the stated financial institution and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

4 Comments

Book Review

Thinking, Fast and Slow - Prospect Theory and Loss Aversion

By The Boy Who Procrastinates - March 09, 2019

In my earlier post, I have shared a book review on Thinking, Fast and Slow by Daniel Kahneman, chiefly on the subject of Anchoring Effect and its application on the financial decisions we make on a daily basis.

Picking up where I left off, I will be focusing on one of the fundamental concepts of behaviorial economics introduced in the book.

Prospect Theory

The prospect theory was developed by psychologists, Daniel Kahneman and the late Amos Tversky, as a theory of decision-making under conditions of risk and uncertainty.

It runs contrary to the normative implications inherent in the classical theory of expected utility by mathematician Daniel Bernoulli (even though he has used the St. Petersburg paradox to demonstrate the limitation of expected value as standard decision rule). Instead, the prospect theory presents a more psychologically accurate model of human decision-making.

It posits that (1) people make choices by framing around a reference point and that (2) people tend to overweight losses with respect to comparable gains and respond to the probabilities of such outcomes in a nonlinear fashion.

Certainty

Problem 1: Which option will you choose?

Get $900 for sure
90% chance to get $1,000 and 10% chance to get $0

Despite both options having the same expected utility, most people are likely to be risk averse and choose to receive the $900 for sure. This is because we tend to overweigh options that are certain and hence, adopt a risk averse attitude towards gains.

For example, awarding $120 cashback after charging $400 to a credit card might be a more appealing and effective marketing tactic than having a chance to win $150 after spending the equivalent amount.

But how will our choice differ if we construct the problem in the negative domain?

Problem 2: Which option will you choose?

Lose $900 for sure
90% chance to lose $1,000 and 10% chance to lose $0

If you are like most other people, you will probably choose to gamble in this scenario. The certain loss of $900 is very aversive and this drives people to be risk-seeking in the realm of losses.

Fundamentally, the contrasting attitudes towards risk with favourable and unfavourable prospects depends largely on the way we frame outcomes as gains or losses.

Reference Point

Problem 3: In addition to whatever you own, you have been given $1,000 and are now asked to choose one of the following options:

50% chance to win $1,000
Get $500 for sure

Problem 4: In addition to whatever you own, you have been given $2,000 and are now asked to choose one of the following options:

50% chance to lose $1,000
Lose $500 for sure

You might have guessed it. Majority of the respondents preferred to receive $500 for sure in Problem 3 and accept the gamble to lose $1,000 in Problem 4.

Even though the final states of wealth are identical in both scenarios, the comparison between them underscores the dominant role of a reference point from which the options are evaluated.

The reference point of Problem 1 is higher than the current wealth by $1,000, and it is considered a gain of $500 if you were to increase your wealth by $1,500. Conversely, the reference point for Problem 2 is higher than the current wealth by $2,000 and increasing your wealth by $1,500 is considered a loss of $500.

Therefore, an individual views monetary consequences in terms of changes from a neutral reference point. For financial outcomes, the common reference point is the status quo. For most investors, the entry prices at which they have taken position for their investment may be a reference point.

In other situations, it can be the outcome that you have expected or feel entitled to, for example the increment or bonus that your colleagues receive. Outcomes that are better than the reference point are considered gains and consequently outcomes below the reference point are losses.

Loss Aversion

One basic tenet of the prospect theory is loss aversion. It reflects a prevalent avoidance behaviour involving choices that could lead to losses. To most people, losses loom larger than gains when weighted against each other, resulting in an asymmetrical impact in our decision-making process.

Many of the choices that we frequently come across are presented as an ambivalent shade of grey instead of a strictly dichromatic palette of black and white. There is a risk of loss and an opportunity for gain. Such scenarios with the element of mixed prospect can range from an investor evaluating the feasibility of investing in a company to the strategy employed in a soccer match.

To illustrate this, let's consider an elementary example of such quandary:

Problem 5: You are offered a gamble on the toss of a coin. Would you accept it?

Tail: Lose $100
Head: Win $150

Even though the expected value of the gamble is positive (an individual stands to gain more than he can lose), most people are likely to reject the game. This is because the fear of losing $100 is more intense than the hope of winning $150.

For most of us, the amount we could possibly win has to be at least twice as large as the amount we could lose before we are willing to accept the gamble.

Interestingly, our sensitivities to losses can be traced back to evolutionary history in which organisms that initiated urgent action in response to threats as compared to opportunities, have a better chance of survival and procreation. As such, it would make sense that we experience greater pain of loss than joy of gain of comparable magnitude.

I don't like losses, sport. Nothing ruins my day more than losses. — Gordon Gekko, Wall Street

Closing Thought

The prospect theory is one of the most influential concepts in behavioral economics which sheds light on the way we react to gains and losses. In most cases, people might be daunted and discouraged by the fear of making losses. This ultimately drive them to procrastinate or even abandon the idea of taking the first step to investing, even though they might be giving up on opportunities to earn more.

Understanding the psychology of gains and losses may be a primary move to overcome our fear when it comes to investing.

If you do not wish to miss out on any articles, you may consider following the facebook page for timely update.

Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with the publisher/author and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

3 Comments

Investment

Decision Tree on the General Offer for M1

By The Boy Who Procrastinates - February 13, 2019

Amidst the Lunar New Year festivities, the past few weeks could potentially be momentous for many M1 shareholders. This emanates from the ongoing voluntary general offer for M1 which will be closing on 18 Feb 2019.

Having vested in M1 myself, I too am in a quandary over whether to accept the offer or not. You see, I have purchased it when i first started out learning the art of investing as a beginner. It was in 2015 when it was priced steeply above $3 per share. But I will probably save the tale of woe for another time.

In this current predicament, we can grouse about the perceived unfair offer price or we can play the hand that we have been dealt. In this article, I will focus on the latter and lay out the decision tree on the course of actions that is available for the minority shareholders.

Update as of 19 Mar 2019

Following the closure of the Offer, Konnectivity has annouced that the total number of shares owned or agreed to be acquired by Konnectivity represent 94.55% of M1. With that, Konnectivity intends to compulsorily acquire the shares of the shareholders who have not accepted the Offer. The trading of M1 shares has been suspended.

Update as of 27 Feb 2019

Further acceptances have been accepted, resulting in the Konnectivity controlling 90.15% in M1. As there is now less than 10% of the total number of issued shares of M1 held by the public, the free float requirement will not be fulfilled. Therefore, M1 will be delisted from SGX after the offer closes.

The closing date of the offer has thus been extended from 4 Mar to 18 Mar.

Update as of 26 Feb 2019

For shareholders who have accepted the offer before it becomes unconditional, they should have received the sales proceed on 26 Feb. It will be credited directly to the designated bank account.

Update as of 15 Feb 2019

It is announced that Axiata has accepted the voluntary general offer made by Konnectivity for its entire stake in M1.

M1 has also released a statement to declare that the Offer has become unconditional with the total number of shares owned or agreed to be acquired by Konnectivity representing 76.35% of M1.

The closing date of the offer has thus been extended from 18 Feb to 4 Mar.

For shareholders who have accepted the Offer before the announcement, they will receive the payment within 7 business days (by 26 Feb). For those who have yet to accept but would like to do so, will receive the payment within 7 business days after the Konnectivity has received their acceptance.

Currently, Konnectivty has yet to achieve the revised compulsory acquisition threshold of 93.33% but has reached the majority approval threshold of 75% in the event of a delisting resolution.

Based on the information available, I feel that the recent move by Axiata might spur higher acceptance rate among minority shareholders who have yet to reach a decision, which might amplify the possibility of a delisting scenario.

Offer

On 27 Sept 2018, Keppel Corporation Limited and Singapore Press Holdings Limited has made a voluntary general offer to acquire the remaining stakes in M1. It is carried out via Konnectivity Pte Ltd ("Konnectivity"), a joint venture company majority held by Keppel.

The Offer Price for each M1 share is at $2.06. In order for the Offer to turn unconditional, Konnectivity should be holding more than 50% of M1 Shares (minimally 50% + 1 share) by the end of the Offer period.

Pursuant to Rule 28.1 of the Singapore Code on Take-overs and Mergers, Konnectivity is required to announce and inform SGX on the following day after the offer becomes unconditional.

Given that there has not been announcement of such nature by Konnectivity (other than the mandatory declaration of valid acceptance on 22 Jan when it has extended the closing offer date), I would think it is safe to assume that the 50% threshold has yet to be satisfied.

Intention of Konnectivity

According to the Offer Document, the stated intention of Konnectivity is to gain majority control of M1. Konnectivity will, following the close of Offer, conduct a review of M1's operation with the aim of implementing strategic and operational changes to allow M1 to compete more effectively in the telecommunication sector.

As such, the majority control obtained by Konnectivity will allow it to facilitate the business transformation of M1.

Current M1 Shareholders

According to the 2017 Annual Report, the top 3 substantial shareholders of M1 (as of 22 Feb 2018) are as follows:

Prior to the start of the general offer, Konnectivity has an aggregate interest of 33.32% in M1. As of 22 January 2019, Konnectivity has announced that it has received acceptance of 1.05% of the total shares. This brought the total amount of shares owned by Konnectivity to 34.35%.

Therefore, Konnectivity needs only to acquire an additional 15.65% of the total number of shares in order to reach the 50% threshold. Apparently, Axiata is holding the trump card in this offer.

Contrary to general expectation at the outset of the Offer, I would think it is unlikely that Axiata will mount a counteroffer at the eleventh hour, with just less than a week left to make a decision.

Compulsory Acquisition

In the event that Konnectivity has received valid acceptance or has acquired shares that totalled to 93.33% or more of the total number of M1 issued shares (90% of the shares that Konnectivity does not own at the date of offer), Konnectivity has stated that it intends to exercise its right (under Section 215, Companies Act) to compulsorily procure the remaining unacquired shares on the same offer term. This will ultimately result in the delisting of M1 from SGX.

If Konnectivity has failed to acquire the sufficient number of M1 shares to compulsorily acquire the remaining M1 shares, Konnectivity may request M1 to apply to SGX to be delisted provided that:

delisting resolution is approved by a majority of at least 75% of the total number of issued shares and
delisting resolution is not voted against by 10% or more of the total number of issued shares

In a similar fashion, Axiata has a pivotal role if the scenario of a delisting resolution plays out.

Free Float Requirement

Pursuant to Rule 723 of the Listing Manual, there should be at least 10% of the total number of issued shares of a listed company held by the public at all time. If the percentage of the total number of M1 shares held in public hands fall below 10%, SGX may suspend the trading of M1 shares at the close of the Offer.

Under the Listing Manual, "public" in this case refers to, among other things, persons other than substantial shareholders (ownership of 5% or more of the voting shares of M1), hence effectively excluding Axiata by the definition.

In the event that the free float requirement has not been met, Konnectivity has stated that it does not intend to preserve the listing status of M1. However, under such situation, Konnectivity may not be able to compulsorily procure the remaining unacquired shares if the compulsory acquisition threshold of 93.33% is not achieved.

To put it simply, if Axiata does not tender all its shares (28.69% interest) in acceptance of the Offer and there is less than 10% of M1 shares held by shareholders who are members of the public, the trading of M1 shares will remain suspended.

To ensure that shareholders do not have to hold suspended shares for an indefinite period, Konnectivity has obtained a conditional confirmation for waiver of aforementioned conditions to the delisting resolution from SGX in the event that M1 does not meet the free float requirement. In such circumstances, Konnectivity will offer cash exit alternative on the same terms as the Offer to the remaining shareholder, which may eventually lead to the delisting of M1.

Decision Tree on the General Offer for M1

With all the information presented above, we can now delve into the decision tree on the general offer.

(click to enlarge)

It might appear a little intricate at first glance, but fret not. The subsequent sections will break down the branches of the decision tree.

M1 shareholders can choose to either accept the offer by completing the Relevant Acceptance Form or not accept the offer.

Alternatively, shareholders can also choose to sell their shares on the open market and lock in at the prevailing price. At the time of writing, M1 is currently priced at $2.04 per share.

I would think that this is probably due to pessimism surrounding the conditionality of the Offer and some may choose to seal the deal, albeit at a price lower than the Offer price.

Nevertheless, selling it on open market can justifiably be considered a more straightforward option at this stage. The difference is insignificant at $0.02 per share (excluding transaction fee) and it offers a higher degree of certainty than participating in the Offer.

Accept the Offer

If the shareholder has decided to accept the offer, there are 3 possible scenarios that could play out, depending on the amount of shareholding interest owned by Konnectivity by the close of Offer:

Konnectivity owns less than or equal to 50% of M1 issued shares

Should the Offer fail to become unconditional, it is likely to be business as usual for M1 and its shareholders. Konnectivity will not be able to gain majority control of M1. The relevant number of Offer shares will be returned to the shareholder's CDP account no later than 14 days from the lapse of the Offer.

Previously, Axiata, Keppel and SPH have ended their strategic review on the divestment of their stakes in the telco without reaching a consensus in July 2017. Following the news, M1 stock has fallen approximately 9%.

In my opinion, the share price of M1 is likely to fall back to the price level prior to the general offer, if not more.

Konnectivity owns more than 50% but less than 93.33% of M1 issued shares

If Konnectivity owns more than 50% of M1 shares by the close of Offer, the Offer will become unconditional. As such, the shareholder will receive the payment within 7 business days.

Having achieved majority control of M1, Keppel and SPH will likely to proceed with their stated intention of facilitating the business transformation of M1. It is anyone's guess as to how successful M1 will turn out to be under the management of Keppel and SPH.

However, I would anticipate the share price of M1 to fall below $2 in the short term. This could be attributed to the mediocre 2018 financial results, as well as the increasingly competitive landscape of the telco industry.

Alternatively, Konnectivity may request M1 to apply to SGX to be delisted. But this would depend on how likely it is to attain approval of at least 75% of the issued shares. For example, if Axiata does not accept the Offer, the delisting of M1 will be highly improbable.

Konnectivity owns more than or equal to 93.33% of M1 issued shares

In such scenario, Konnectivity has intended to exercise its right to compulsorily procure the unacquired shares and proceed to delist M1 from the local bourse.

Similarly, the shareholder will receive the payment within 7 business days after the Offer becomes unconditional.

Does not Accept the Offer

If the shareholder has decided not to accept the offer, there are also 3 possible scenarios that could play out, depending on the amount of shareholding interest owned by Konnectivity by the close of Offer:

Konnectivity owns less than or equal to 50% of M1 issued shares

Similarly, it is probable to be business as usual for M1 and its shareholders. With less than or equal to 50% of shares, Konnectivity will be unable to gain majority control of M1.

In my opinion, the share price of M1 is likely to fall back to price level prior to the general offer, if not more.

Konnectivity owns more than 50% but less than 93.33% of M1 issued shares

If Konnectivity has achieved majority control of M1, Keppel and SPH will likely to proceed with their stated intention of facilitating the business transformation of M1.

Alternatively, Konnectivity may request M1 to apply to SGX to be delisted which may hinge upon the result of the general offer.

Konnectivity owns more than or equal to 93.33% of M1 issued shares

In such scenario, Konnectivity has intended to exercise its right to compulsorily procure the unacquired shares and proceed to delist M1 from the local bourse.

Even if the shareholder has not accepted the offer at the onset, he has to relinquish his shareholding on the same offer term.

Closing Thought

For the past few months, M1 has been trading narrowly between the range of $2.04 to $2.12. And it is evident that the share price is being propped up by the offer price. If this price support is to be removed, M1 share price is likely to sink further.

Personally, I think it is unlikely that Konnectivity will be able to obtain 93.33% or more ownership of M1 shares. There could probably be an equally likely chance of Konnectivity owning less than or more than 50% by the close of Offer. I would presume that most might take a side towards the end of Offer period while waiting to see if Axiata is making any move.

With the increasingly competitive landscape of the telecommunication industry, worsened by the establishment of low-cost mobile virtual network operators, it is challenging to operate in the current saturated market.

It would appear that the industry model is no longer the secured oligopoly as it once was. The pricing pressure aggravated by the incoming TPG Telecom, as well as the rising adoption of the cheaper SIM-only plans have posed a double whammy to the underlying revenue of existing telco.

To be frank, I am not sanguine on the outlook of telco industry at this stage. Furthermore, I imagine that M1 share is likely to trend downward regardless of the outcome of the general offer. Having said that, I would consider either selling it on open market or completing the Relevant Acceptance Form.

If you do not wish to miss out on any articles, you may consider following the facebook page for timely update.

Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with the stated entities (other than being an investor of M1) and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

12 Comments

CPF

Unlocking the Potential of CPF

By The Boy Who Procrastinates - February 04, 2019

For the past decade, the restriction on the withdrawal of CPF funds and its reliability as a retirement solution has remained a perennial concern among Singaporeans, particularly for the senior generation. In addition, the national pension system has often drawn flaks for its annual increment in the minimum retirement sum.

Regardless of the sentiment, the CPF will continue to be a hot button issue among Singaporeans. Similarly for me, it has remained at the forefront of the conversations that I have with my friends, especially when we have reached the ideal age range and of stable financial capabilities for BTO.

As 20% of our monthly salary is being stashed away in CPF, I feel that it is perhaps time to go back to the basics and understand this pension system better. For that reason, I would like to initiate a series of articles on CPF and to pen down my thoughts on how it can fit in as part of our retirement planning.

Additional 1% paid on the first $60,000 in combined CPF accounts

As part of the changes to CPF system in 2008, the first $60,000 in the combined CPF balances, with up to $20,000 from the Ordinary Account (OA), will earn an extra 1% interest.

To illustrate this simply, I have come up with a few common scenarios to elucidate the conditions imposed on the balances across the 3 accounts in order to earn the additional interest.

Scenario 1: Even though the individual has a total of $65,000 of combined balance in his CPF accounts, only $45,000 of it is eligible to earn the additional 1% interest. This is because there is a cap of $20,000 balance contributed from the OA.

Scenario 2: The combined balance that will rake in the extra 1% interest is capped at the first $60,000 even though the CPF member has a total of $100,000 across all 3 accounts.

Scenarios 3 & 4: These two are extreme examples that serve to exemplify the working of the CPF interest rate system, chiefly for those who might have insufficient fund in their OA. Basically, you will be able to bag the extra 1% interest as long as you have $60,000 in the combined (or either) accounts of SA and MA.

In a nutshell, the table above outlines the basic idea of the interest rates across OA, SA and MA after taking into consideration the bonus interest earned.

To add on, CPF members aged 55 and above, will earn an additional 1% on the first $30,000 of their combined balance, on top of what is presented above.

Where does the additional interest go to?

Initially, I had the misconception that the additional interest earned will be returned to the respective accounts. Naturally, it would be a logical deduction that one can make. But I was wrong.

Instead, the extra interest received will go into either the individual's SA (below age 55) or Retirement Account (RA) (age 55 and above).

CPF Allocation Rates

With the current CPF allocation rate as tabled above, it is reasonable to extrapolate and assume that the OA will have the highest balance, followed by MA and then SA. At least, that is the trend that I have observed for my CPF accounts.

Hence, I reckon that most working adults under the age of 35, might find themselves in situations closely resembled that of Scenario 1 in which the amount of extra interest received is not maximised.

Power of Compounding

For CPF members below the age of 55, the maximum amount of extra interest that he can earn each year is $600. It might not seem much with just an additional $50 per month. But when time is on our side, it might evolve into a formidable ally eventually.

Give me a minute, I'm good.
If I've got an hour, I'm great.
You give me six months, I'm unbeatable.
- Col. John 'Hannibal' Smith (The A-Team)

Suppose that we carry out a projection of the $600 additional interest yearly and lay out the following simple assumptions:

Timeline of 25 years to reach the CPF withdrawal age of 55
Extra interest is credited to SA at the end of the year
Balance in SA earns 4% interest (compounded annually) for the next 25 years

The accumulation of the extra interest alone would snowball to $26,587 over the span of 25 years. This would also bring us closer to meeting the Full Retirement Sum ("FRS") when it is time for us to enjoy the fruits of our labour.

As much as I am at variance with the illiquidity aspect of CPF funds, I have to acknowledge the power of compounding effect over time. In this case, it has accounted for 41.32% of the ending balance after 25 years.

Hence, I am convinced that we should optimise the additional interest, especially for working adults at the nascent stage of their careers and with time as their advantage.

Ways to Optimise the Additional Interest

1. Transferring from Ordinary Account to Special Account

Given the CPF allocation rate as tabled above, it is highly likely that the OA balance will exceed the $20,000 cap after 2 to 3 years of working.

Thereafter, the most straightforward way to optimise the additional interest is to carry out a transfer from OA to SA so as to circumvent the upper limit imposed on the OA balance. Furthermore, the transferred funds would earn a higher interest at 4% in SA, instead of 2.5% in OA.

Nevertheless, one should be cautioned on the irreversibility (one-way) of such process. The underlying concern stemmed from the comparatively versatile nature of the funds in OA than that in SA. For example, the OA balance can be utilised for the servicing of mortgage and as payment for tuition fee, but not with the funds in SA.

Thus, the tradeoff of shifting from OA to SA is unquestionably the confinement of choices that one may have with regard to the usage of OA funds.

2. Make a Voluntary Cash Contribution

For those who have already come up with a game plan for the usage of OA balance, the next strategy on the playbook is to make a voluntary cash contribution to either SA or MA. This comes with the added benefit of income tax relief of up to $7,000 per year.

As always, there are 2 sides to a coin and the tradeoff is between the liquidity of cash and the locking up of retirement funds until the age of 55 (subjected to the fulfillment of FRS).

Closing Thoughts

With the various restrictions imposed on the withdrawal of CPF funds, it is of little wonder that many have labelled the pension system as "money that you can see but cannot touch".

In spite of that, I feel that the combination of the compounding effect as well as the ample time available until retirement, would certainly arm young working adults or even students with the advantage of meeting the FRS early. Thus, it would probably make sense to optimise the additional interest and reach the $60,000 balance as early as possible.

If you do not wish to miss out on any articles, you may consider following the facebook page for timely update.

Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with any of the parties mentioned and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

4 Comments

Revision of Terms and Conditions for Maybank SaveUp Account

Summary of the Current Interest Rate mechanism for Maybank SaveUp Account

Revision of Terms and Conditions for Maybank SaveUp Account from 1 April 2019

Maybank Privilege SaveUp Programme

Overview of the Revision

Impact of the Revision on Interest Rate

Comparison with other Active Savings Accounts

Thinking, Fast and Slow - Prospect Theory and Loss Aversion

Prospect Theory

Certainty

Reference Point

Loss Aversion

Closing Thought

Decision Tree on the General Offer for M1

Update as of 19 Mar 2019

Update as of 27 Feb 2019

Update as of 26 Feb 2019

Update as of 15 Feb 2019

Offer

Intention of Konnectivity

Current M1 Shareholders

Compulsory Acquisition

Free Float Requirement

Decision Tree on the General Offer for M1

Accept the Offer

Does not Accept the Offer

Closing Thought

Unlocking the Potential of CPF

Additional 1% paid on the first $60,000 in combined CPF accounts

Where does the additional interest go to?

CPF Allocation Rates

Power of Compounding

Ways to Optimise the Additional Interest

Closing Thoughts

Follow Me

Search This Blog

Fellow Readers

Blog Archive

Categories

Featured post

Amassing $100,000 Before The Age Of 30

Blogroll

Resources