1 year extension of 4% floor rate for all smra monies

i bring u good tidings from a media release today with the cpf board having announced that our government has decided to further extend the 4% floor rate for interest earned on all smra monies for another year until december 31, 2012. furthermore, the first $60,000.00 of a cpf member's combined balances will continue to earn an additional 1% interest*.

*An additional 1% interest will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). The additional interest received on the OA will go into the member’s SA or RA to enhance his retirement savings. If the member is above 55 years old and participates in the LIFE scheme, the additional 1% interest will also be payable on his annuity premium, less annuity payouts already made. The additional interest earned on the member’s LIFE annuity monies will be paid into his RA.

this extension is definitely good news for all cpf members in view of the current market turmoil, uncertaintiy in the global economy and low interest rate environment.

since january 01, 2008, the formula for determining the interest rate in the smra accounts has been changed to one which is pegged to the 12 month average yield of 10 year singapore government securities plus 1%.

and to help cpf members cope with the transition, our government has continued to provide the 4% floor rate for smra monies up to december 31, 2009 and has been extended twice to december 31, 2010 and december 31, 2011. and now, a further extension to december 31, 2012.

fyi, if the new peg is implemented, the average yield of the 10 year singapore government securities plus 1% from september 1, 2010 to august 31, 2011 works out to be just 3.30%, much lower than the guaranteed 4%.

however, the latest extension to december 31, 2012 may be the last because effective january 01, 2013, the smra rates will be pegged to the 12 month average yield of 10 year singapore government securities plus 1%, subject to the floor rate of 2.5% per annum.

my comments:

i applaud the generousity on the part of our government to pay the higher yields on cpf monies which to me, is like insurance protection with guaranteed yields. this is especially so when it is difficult to find happy campers who have invested their monies because it is not uncommon to see global and regional markets awashed in red ink almost on a weekly basis.

in fact, the fed led by chairman ben bernanke has in the last fomc meeting in august 2011, agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

in other words, the fomc's view is to keep the ultra low interest rate environment until mid 2013 warranted by economic conditions.

therefore, do take advantage of the ultra high almost risk-free returns from the cpf smra accounts while the going is good. what's more, even the first $20,000.00 in the cpf-oa earns a return of a higher 3.5% interest (but the extra 1% interest earned will go to the cpf-sa account).