ST Forum Nov 17, 2006The 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:
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.
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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