3 Reasons Why REITs Can Substitute Your CPF Special Account

Starting January 2025, Singaporeans aged 55 and above will face a significant change in your Central Provident Fund (CPF) structure: the CPF Special Account (SA), which currently offers a risk-free yield of 4% per annum, will no longer be available.

This presents a dilemma for those who rely on their CPF for secure returns as part of their retirement planning. With the closure of the SA, you are left with two less attractive options:

Parking their funds in the Ordinary Account, which yields a lower 2.5% per annum but is withdrawable (provided you have set aside the Full Retirement Sum)
Committing their funds to the Retirement Account, where the funds are no longer withdrawable as they will be used to participate in the CPF life

For individuals looking for comparable returns and increased flexibility, Real Estate Investment Trusts (REITs) present an attractive alternative.

In this article, we’ll explore why REITs can be a viable substitute for your CPF Special Account and how they can help you achieve your retirement income goals while preserving your capital.

1: REITs Offer Competitive Yield

One of the primary reasons why CPF members have long relied on the Special Account is its attractive 4% risk-free yield. With the closure of the SA, many retirees will find it difficult to achieve similar returns.

REITs offer dividend yields that can match or even exceed the CPF Special Account. Many Singapore-listed REITs provide yields in the range of 4% to 6%, offering retirees a sustainable income stream that is comparable to what they enjoyed with their Special Account.

Key Benefit: With a carefully selected portfolio of REITs, you can generate passive income at yields competitive with the former CPF Special Account, helping you maintain the returns necessary for your retirement plan.

2: Regular Income With Liquidity

As an asset class, REITs are designed to offer investors a regular dividend payout and liquidity, both of which are important considerations for retirees.

Singapore REITs typically pay over 90% of their earnings in the form of dividends on a semi-annual basis, providing a predictable and reliable passive income stream. In addition, REITs are publicly traded on the Singapore Exchange (SGX), meaning investors can sell their shares anytime, giving them flexibility over their capital, unlike physical property investments.

However, the downside to being securitized and exchange-traded is that the share price of the REITs is subjected to market volatility which can send share prices moving anywhere between ±10% to 20% per year.

While this exposes investors to the risk of capital losses, with careful selection of REIT and a long-term investment horizon, the use of REITs would provide you with a high capital preservation capability.

Key Benefit: REITs provide retirees with the flexibility to access their capital if needed while continuing to generate a stable stream of passive income. While there are downsides to the use of REITs, they are easily overcome with proper selection and a long investment horizon.

3: Capital Preservation & Stability

While CPF members may be concerned about the potential risk of investing in REITs compared to the guaranteed nature of the Special Account, it’s important to note that REITs offer relatively stable and predictable returns.

REITs invest in physical properties, such as shopping malls, offices, healthcare facilities, and logistics centres, which generate consistent rental income and have inherent value.

Furthermore, REITs in Singapore are required to distribute 90% of their taxable income to shareholders to qualify for tax transparency treatment, which helps ensure a steady flow of dividends.

Retirees with lower risk tolerance and higher preference to preserve their capital may find blue-chip REITs with solid fundamentals and diversified portfolios to be a secure investment choice that strikes a balance between risk and returns.

Key Benefit: With their focus on income-generating real estate assets, REITs can provide retirees with the capital preservation and income stability they need for retirement.

Conclusion

As Singaporeans aged 55 and above face the closure of the CPF Special Account, many will need to find alternative ways to achieve both income and capital preservation for their retirement plans.

REITs provide a compelling solution, offering competitive yields, regular income, liquidity, and capital preservation abilities. While investors are exposed to higher risk when investing in REITs as compared to CPF accounts which are risk free, these risks associated with REITs can be easily mitigated via careful selection and a long investment horizon.

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