Central Provident Fund (CPF) members will continue to get an interest rate of 4 per cent on a portion of their savings for the next three months.

This is the minimum rate guaranteed by the Government for three CPF accounts: Special, Medisave and Retirement Accounts (SMRA).

Savings in the Ordinary Account will earn an interest of 2.5 per cent.

The 4 per cent guarantee is for two years, starting from Jan 1 this year, said a statement from the CPF Board yesterday.

Thereafter, the floor rate will be 2.5 per cent for all CPF accounts.

The change follows a modification in the way the CPF interest rate is being calculated, a move Prime Minister Lee Hsien Loong announced last year.

With the change, the interest rate for the SMRA is pegged to the 12-month average yield of the 10-year Singapore Government Security plus 1 per cent.

This market-based rate, which fluctuates every three months, was introduced on Jan 1 this year.

However, it was not applied and will take effect only from 2010.

The CPF Board, in its statement, worked out this floating rate for the one-year period, from Sept 1 last year to Aug 31. It averaged 2.77 per cent.

A chart it gave showed the peak was in June, at around 4 per cent. The lowest was in late February, around 2 per cent.

Eventually, the SMRA interest was 3.77 per cent, including the extra 1 per cent. In the old system, the SMRA got a fixed interest of 4 per cent.

Another change in the new rate structure is the interest for the first $60,000 saved in all the CPF accounts of a member. Only $20,000 of this sum can be from the Ordinary account.

The combined balance will earn an extra 1 per cent interest. So, the SMRA will get 5 per cent and the Ordinary Account, 3.5 per cent.

The extra interest will go into the member?s Special or Retirement Account to boost his or her retirement savings.

This article was first published in The Straits Times on September 10, 2008.