You might lose money in FD using your CPF.

Last week, i witnessed an unusual case. One of my client (Mr X) invested $100K of his CPF OA into a bank fixed deposit(FD) product last year. This FD pays 3.2% p.a. for 6 months. Compared this rate with CPF OA's 2.5% p.a. , it looks like a sure win situation (or is it?)

As usual, the devil is in the detail. Let me share with you this case.

1. If Mr X's $100K remain in CPF OA from Jan 2006 to Dec 2006.

Under CPF's rule, CPF interest rate is monthly rest. The effective interest rate per month is 2.5% /12 = 0.208%. Therefore, the interest per month for $100K is $208.

The total interest for 12 months is thus 12 x $208 = $2,500.

The total capital plus interest is therefore $100K + $2.5K = $102.5K

2. However, Mr X actually transferred $100K into FD (3.2% p.a. for 6 months) from Jan 2006 to Jun 2006.

The effective interest rate per month is 3.2% / 12 = 0.267%.

The interest per month for $100K is $267.

For 6 months, the interest is therefore $267 x 6 = $1,602.

When the FD matured on Jun 2006, the bank transferred the proceeds to the CPFIS and remain there for 2 months before it was being automatically transferred back into CPF OA on Sept 2006. While the money was in the CPFIS from July and August, the bank paid neligible interest close to 0%. Since the money was not in CPF OA, CPF did not pay the interest rate as well.

From Sept 2006 to Dec 2006, the total capital of $101,602 earned an interest of $845. This made the year end balance of this $100K capital to be $100,000 + $1,602 + $845 = $102,447.

The CPFIS bank also imposed $2 per FD transcation charge, and $4 service charge ($2 per quarter per counter).

The resulting balance is $102,447 - $2 - $4 = $102,441.

Let me bring back the earlier illustration if Mr X did nothing to his CPF OA, his $100K would have been $102,500!

The whole saga made Mr X a fool.

Lesson learnt:

a. When you invest your CPF OA, take note of the maturity date.

b. Transfer the maturity proceeds back to your CPF OA immediately. (Otherwise, this proceeds will sit in the CPFIS account for 2 - 3 months before the CPFIS bank transfers the proceeds to you CPF OA.)

c. You can effect the transfer immediately using ATM, internet banking, or go to the bank to fill up an instruction form for this purpose.

As to Mr X, he has since terminated all his dealings with this bank.