I'd like to take a swing at explaining Accrued Interest.
Consider the basic situation of person A with X dollars in his CPF account. Over the next 10 years, he gets Y dollars of interest on it. So X dollars has grown to X+Y dollars.
Now compare that to person B who uses X dollars from CPF to buy a HDB flat and sells it in 10 years for X+Z dollars. How much should be returned to person B's CPF account?
We know that the CPF Board asks that more than X dollars be returned and the amount in excess of X dollars is the "Accrued Interest". Let's talk about how much it should be and whether it is justified for there to be any Accrued Interest at all.
(Off the bat, in view of the toxic climate around all things CPF, let me first say that I take the SDP position that a promise is a promise and Singaporeans should be alike to choose, at retirement, whether to withdraw and handle their CPF monies themselves or let the CPF Board help them do it. Let me also state that the Minimum Sum is irrelevant to the point on Accrued Interest. Now let's continue explaining Accrued Interest.)
What is the guiding principle? My deconstruction is that fairness is being applied to the "no withdrawals before retirement" rule. So if person B were to only return X dollars to his account, it would be as if he had withdrawn Y dollars early. So it is reasonable to ask that X+Y dollars be returned. There is no basis to make person B put all of X+Z dollars back into his account, so as per current rules, persona B gets to keep Z-Y dollars. That makes sense on the basis of fairness.
Now what happens when Y is greater than Z? In that case, what if person B cannot afford to deposit X+Y into his CPF account? Then a "practicality consideration" arises. If X+Y exceeds X+Z, then the CPF Board allows person B to return only X+Z to his account. This might be regarded as "compassion" by some, but I think of it as simple practicality.
(Government worriers might have tried to make it such that X+Y dollars needs to be refunded regardless, citing the "possibility" that people might sell flats at a loss and take a cash kickback in order to make early withdrawals, but I am glad common sense prevailed. Also, I hope it is clear that the toxic Minimum Sum has nothing to do with this. A lot of this Accrued Interest action happens in peoples' 30s and 40s.)
I think that in view of this, Accrued Interest is not such a big travesty, it being based on fairness applied to the no early withdrawal rule. So why has the Ministry of Manpower been so inept in its communication? (See below.)
Jeremy Chen
*Article first appeared on https://www.facebook.com/notes/jeremy-chen/explaining-accrued-interest-a...