17 November 2006

More on Life and Money

ST Forum Nov 17, 2006
50% less returns from investment

IN NOVEMBER 2002 I invested $10,000 in an AIA investment scheme for five years, using funds from my CPF Special Account.

Recently, AIA informed me that, as of this month, the amount earned on the investment after four years is $800-plus.

I wonder how much the company will pay me on maturity next November - maybe another $200 more.

The CPF Special Account pays 4 per cent interest and had I not taken out my funds I would have earned $2,000 in five years.

On the other hand, AIA will pay me only about $1,000. When the account was opened, I was given to understand that the returns would be about 6 per cent.

If I close the account now, I may incur a penalty.

There should be rigorous checks and controls on companies seeking to tap CPF members' Special Account funds.

N. Ishwaran
The letter doesn't say exactly what AIA product Mr Ishwaran bought. But Mr Wang can hazard a few guesses as to what might have happened here. Here goes:

Firstly, Mr Ishwaran thought he invested $10,000. Actually, he probably invested less than that. $10,000 was deducted from his CPF account, but a good chunk of it went to the insurance agent's pocket, as commission.

Another chunk of the $10,000 went towards paying the pure premium for his life insurance. In other words, AIA had promised to pay him $X if he dies anytime between 2002 to 2007. In return for this promise, Ishwaran has to pay AIA.

A third portion of his $10,0000 went to his agent bank. When you wish to invest your CPF money, you need to open an account with either DBS, OCBC or UOB. Then whenever you do something (like buy into an AIA investment scheme with your CPF Special Account money), the agent bank charges a fee.

After deducting these three payments, we see that Ishwaran actually invested quite a lot less than $10,000. So he really can't expect such high returns.

Poor Mr Ishwaran. If only he'd understood all that, before he invested.

More generally - the money in your CPF Special Account earns 4% per annum. This is a good return, considering that the return is guaranteed, by none other than the government of Singapore (a triple-A rated entity). In the financial world, this kind of investment is considered "risk-free".

If you choose to invest your CPF Special Account money elsewhere, you could possibly get returns high than 4%. On the other hand, you also have to take the risk not just of earning less than 4% (which is what happened to Mr Ishwaran), but of losing part of your principal sum. For most people, I would say that the sensible thing to do is leave your money in your CPF Special Account.

Bear in mind that every sensible investment portfolio needs some diversification. That simply means that you invest in different things, some of which carry lower risks and lower potential returns, and some of which carry higher risks and higher potential returns.

Therefore even if you consider 4% low, you can nevertheless leave your CPF Special Account money alone and think of it as the "low risk" portion of your overall portfolio. You can then allocate a greater part of your non-CPF investment towards riskier investments (such as equities).

Personally I think that 4% is great for a risk-free investment.

See also Mr Wang's recent other post about insurance.

Some people like to use their CPF OA and SA to buy insurance because it's money they can't otherwise use anyway. This is rather naive thinking (unless you need insurance and you really can't afford to pay for it with your own cash). Your CPF isn't doing nothing. It's growing and it's meant for your retirement.

I want to reiterate my view that insurance and investment generally are a poor mix. Treat them separately. Buy insurance for protection's sake; invest the rest to make money. Mr Ishwaran can still achieve outstanding profits on his AIA product; however to do that, he has to die immediately. I don't think he would like that.

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20 comments:

Rowen said...

Just to add on.

For those who want to buy unit trust with any investment companies using CPF, please note the following.

1) there will be a commission of 5% which will be taken off the amount which you invest in the unit trust.

2) the current interest rate by CPF for ordinary account is 2.5%.

Therefore in order for your investment fund to break even, it must appreciate at least 10.18% of your reminding share.

calculation

money after commission.(x)10000- 5% = 9250
This amount will the units you bought.

Money in CPF ordinary account after 1 year if not invested. (y) 10000 X 1.025 = 10250.

y- x = 10250 - 9250 = 1000.

performance gage = 1000 / 9250 x 100% = 10.18%.

Just my 2 cents of a layman investor.

Anonymous said...

It depends on what investment scheme you have chosen. If the fund invest mainly in China stocks than you should find out more why the returns is so minuscule.

G said...

Is the government's handling of CPF account transparent?
Can you as ordinary citizen know how much exactly is there on government's accounts and how it is used? (Basically where the money is?)

If not, then I don't think it is right to say that CPF is risk free, because the government is simply not accountable this case, and no one can assure that the government is not using CPF money to something else, for instance to finance the current wealth of Singapore - burning the retirement money of its own people.

Look at what happened in the eastern european block during the 1970s and 80s.
The financed the relatively high wealth of those countries from World Bank loans, sacrificing the future wealt of their people.
Some countries are still paying back those high debts today, 30 years later.

What are the guarantees that Singapore government is not conserving its power by spending CPF money, if the whole financials are not transparent?

Anonymous said...

Some terms and conditions to note about transfer to SA http://mycpf.cpf.gov.sg/Members/Gen-Info/FAQ/Others/Others-OA-to-SA.htm. The transfer is irreversible, not available to CPF members aged 55 and above, among other things.

Anonymous said...

Someone commented in one of Mr Wang's blogs that Singaporean women are ignorant of the politics and issues - that I would dispute because NOT all women appreciate shopping and Korean soapies. However, sadly it's true to the fact that majority is in oblivion.

For those women who find it hard to be in tune with the writings and reports on reality, perhaps this youtube clip would help to illustrate the current situation in Singapore. See: http://www.youtube.com/p.swf?video_id=62NOErWc0sA&eurl=&iurl=http%3A//sjl-static6.sjl.youtube.com/vi/62NOErWc0sA/2.jpg&t=OEgsToPDskKrdtXN22sSfaY36leAO_So

From: An Ex-Singaporean Woman

Anonymous said...

http://www.youtube.com/p.swf?video_id=
62NOErWc0sA&eurl=&iurl=http%3A//
sjl-static6.sjl.youtube.com/vi/62NOErWc0sA/
2.jpg&t=OEgsToPDskKrdtXN22sSfaY36leAO_So

Anonymous said...

"Look at what happened in the eastern european block during the 1970s and 80s.
The financed the relatively high wealth of those countries from World Bank loans, sacrificing the future wealt of their people.
Some countries are still paying back those high debts today, 30 years later."

That is why those countries were not triple-A rated, unlike Singapore. And note the ratings are given by independent third parties like S&P.

Other point to note is that nothing is really "risk-free" but the term is basically used to refer to the most "risk-free" available kind of investments. Sovereign debt is often considered risk-free because unlike a company, a country can't really go bankrupt and be wound up. Unlike a corporate, a country can always print more money (of course, the worth of the currency may be worth little versus other foreign currencies) or raise taxes. These measures have their implications for the nation as a whole, but these measures also mean that a government should always be able to repay debt in the local currency (ie the government can always print enough SGD notes to repay Singaporeans for their CPF).

chang! said...

This one is spot on. AIA has been in the limelight of late, all for the wrong reason. Lorna Tan of ST had exposed several of their excesses. Wish more, especially among the mid-age are reading your blog. Keep up the good work. Your contributions to society is 10x more than these shoo-in MPs.

Indi said...

I hope we don't have to deal with individual agents anymore since distributions costs are high.

Can we just skip the middlemen and buy any financial products online? Do you think AIA will do that?

Jimmy Mun said...

What a lot of people need to realise, is that the CPF itself is a very simple form of insurance. I speak as a person who has collected CPF money from a deceased person before. If the nomination is done right, the CPF board will contact you within a week for your bank account number, and the money plus Singtel shares and so on, will be transferred with minimal fuss, even if you are a minor (ie under 21). If one dies without a nomination, then the process gets complicated because the allocation of the money will get stuck with the other assets subject to estate tax assessment. Think about it: If your OA+SA+Medisave adds up to 100k, do you still want to pay 100 bucks a month for a whole life insurance coverage of roughly say, 50k?

The process for transferring other assets like money in bank account is not so straightforward, because they are subject estate tax assessment. When the bank is informed of the demise of the bank account holder, they will freeze the bank account. No further transaction is possible until an executor or administrator of the estate of the deceased is appointed, a legal process that will take some time. Having a will helps if there are potential dispute over who should get what proportion, but otherwise will not speed up the process if one dies without a will (intestate).

Dont opt out of the Dependency Protection Scheme. It is the cheapest term life insurance one can buy. Now that the DPS is privatised, make sure you get the nomination done as well; it is now separate from the nomination for the CPF accounts.

Lastly, be careful not to plunge your loved ones into a cashflow crisis, especially if you have zilch in your CPF accounts. Where possible, open a joint bank account which can be withdrawn by any party. When one party of the bank account dies, the money automatically goes to the other party.

G said...

"Other point to note is that nothing is really "risk-free" but the term is basically used to refer to the most "risk-free" available kind of investments. Sovereign debt is often considered risk-free because unlike a company, a country can't really go bankrupt and be wound up. Unlike a corporate, a country can always print more money (of course, the worth of the currency may be worth little versus other foreign currencies) or raise taxes. These measures have their implications for the nation as a whole, but these measures also mean that a government should always be able to repay debt in the local currency (ie the government can always print enough SGD notes to repay Singaporeans for their CPF)."

Exactly!
Of course they can always repay in printed local currency, but then if there is no value behind the currency the whole thing will not worth - you can't pay with that currency outside the coutry for instance.

So if the people have their CPF savings on paper only, but that value is not there anymore because it was used up, then the country won't be able to really pay it properly back, just inflate it.

E.g. Russia did that in the second half of the nineties, where their people had a lot of rubels in their bank accounts, but there was no value behind.
When it was found out, the rubel got hyper inflation and lost most of its value - meaning that your money in the bank has also lost its value.

(Imagine for instance that 1 USD = 500 SGD next week. How is your CPF savings then?)

Robert HO said...

http://i-came-i-saw-i-solved-it.blogspot.com/

Just because my blog has been viewed 312 times in the last fortnight or so, LKY got his ISD agents living and operating in the flat above mine to vandalise my fridge spoiling all the food in the freezer, about $100 worth or so. By now, my aircon, electric typewriter, fax machine, computer hard drives, DVD players, etc, etc, have been vandalised costing me more than $2,000 in repairs/replacements.

These vandalism attacks are not new and have been ongoing for 15 years. I have long documented these in soc.culture.singapore. To know more, if you are interested, do a search there using the search term... RH: LKY crimes... Or visit my blog above, which details proofs that LKY rigged the Cheng San GRC election in 1997. I have 2 eyewitnesses to this sordid deed. That is why Cheng San disappeared from the electoral map after 1997. LKY lost there and could not afford to contest it ever again.

Robert HO
S0197974D

whybeillogical said...

What a lot of people need to realise, is that the CPF itself is a very simple form of insurance.
...


What you have described sounds more like savings than insurance to me. Am I missing something here?

Anonymous said...

hi rowen, I'm a litte confused with the calculation. Can i clarify something?

10000-5%=9500 right?

I have done my investments knowing that 5% will be the amount i will be losing just by buying and selling immediately, just like buying a currency and selling it back to the money changer immediately. This bid offer spread is applicable to all investments.

I believe tat investments r good for money sitting idle in banks earning measly interest of 0.25%! At least i got a chance of better returns by investing. But i just dun like banks and aia cos they have alot of charges! Think they shd declare and explain everything first. What front end charges and back end charges and extra charges if u withdraw early.... by the time they charge finish, your investment is finished... Some other insurance companies and fund managers explain things fully and clearly to investors. My friend from manulife explain all the charges to me first before i invested. She even showed me the calculation u did. But the amt is different. Dat's y i need to double confirm....

Anonymous said...

One can invest online via fundsupermart or dollardex, where the commission is much lower at 2.5%, sometimes even less. This is quite a significant savings over the 5% commission usually charged by banks. Also, when you buy online, fundsupermart is able to track your returns, asset allocation e.g. by country, sector, so it is quite useful

Jimmy Mun said...

The key thing about life insurance, is to cushion the blow on your dependents upon your death or permanent incapacitation. For most people who has worked for a few years, the payout from whatever you have left in OA after housing +SA+Medisave+DPS is easily 75k or more. Not a lot, but it does take care of the immediate financial needs of an average family for at least two or three years. With that in mind, do you still want to take cash out of your pocket, add to your fixed monthly expenditure, to buy extra life insurance, especially whole life insurance for coverage of another , say, 25k?

I just want to point out, in case of your premature demise, the money you leave behind in your CPF is already sizeable. Extra term or life insurance is just icing on the cake. It is an issue of priorities.

The insurance most people should focus their maximum finances on, is really medical, hospitalisation and disability coverage. I will cover more of this in my blog at a later time, but to cut a long story short, please dont opt out of Medishield; in fact, go for the most comprehensive Medishield plan you can find, which should still be from Aviva.

PS I dont sell insurance.

See Fei said...

ya tell me dude, i earned $26 after maturity for a fund bought from another firm.

it is better off to put the money in blue chip and cut off the middle men, ie the fund manager.

Jimmy Mun said...

Some of the best sources of information comes from the most surprising of sources. Larry Haverkamp aka Dr Money of The New Paper runs a wonderful website www.askdrmoney.com.

Take a look at the Best Bank Deposit Rates link to some ideas for better deposit rates for your savings account. For those who need a fast answer, take a look at Standard Chartered's eSavers' account and Maybank's iSavvy account. Both are online savings account with no lock-in period, and you will be paid 1.88% minimum (bid sayonara to 0.25%!) The only catch is that it will be slightly harder to withdraw cash, but you can work around that with a little bit of planning by doing online transfer to a local bank account a few days in advance.

For those with more cash and can tolerate a little lock in, did you know that get 3% or more? Go take a look at the website for some ideas to make your idle cash work harder, relatively riskless.


PS I am not related to Larry Haverkamp or The New Paper.

Fen said...

Since July 1, CPF Board has reduced the sales charge for CPF investments, reducing it from 5% to 3%, which means that investments companies got a big cut of commissions.

But I would still prefer to invest it with an insurance company cuz there's a death benefit.

And after CPF announced the mandatory reduction in sales charge, one company has came up with a new plan for CPF OA and SA investments that requires NO medical underwriting, NO policy fees and admin fees, and a lower assurance charge. Although there's also an incentive for investments of more than 25K, unfortunately the death benefit has also been reduced to 110% from 125% of the sum invested.

So if Mr Wang would like, I can provide more info on that, and by the way it's not from AIA ;)

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