• Daniel Lee

The Ultimate Guide On Short-Term Savings In Singapore

Updated: Oct 15

Updated as at 27 September 2020.

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Introduction

Have you ever asked the question of:

  1. How can you get a higher interest without locking in your savings?

  2. What instrument provides the highest interest rate on your savings?

  3. Should you save with a bank, insurance company, or money market funds?

If so, look no further!


In this article, we will be exploring the different instruments that you can consider when looking at parking your cash savings for higher returns.

The different instruments that we will be talking about will be:

1. Savings account

2. Fixed deposits

3. Short-term endowment

4. Non-participating short-term promotional endowment

5. Non-participating universal life plan

6. Singapore Government Savings Bonds

7. Money market funds

We will be running scenario analysis for a cash balance of $50k, $100k, $150k, and $200k that is to be saved for a period of 5 years.

A brief comparison of the different products within each category and my personal opinion will also be provided.


What classifies as short-term savings

Generally, I would consider short-term savings to be cash that

1. Is to be used for emergency purposes

2. Has a duration of 1 – 5 years


You should not be chasing after returns if you need the funds in less than a year as you simply cannot afford the cost of sacrificing part of your flexibility nor expose it to unnecessary risk.

Summary of analysis

Based on the returns and flexibility, if you want

  • the return and don’t mind giving up flexibility, go with promotional endowments or fixed deposits

  • the flexibility but don’t mind the risk, go with money market funds

  • the flexibility but the risk, go with non-participating universal life policies or normal short-term endowments

Personal Comments and Comparison

Savings account (e.g. multiplier account)

Realistic Annual Return Rate: 0.05% to 1.40%


Savings accounts are often the “go-to” accounts to farm for short-term interest returns.


Generally, there are two parts to a savings account.

  • Base interest rate – that you will get no matter what

  • Bonus interest rate – that you will get for every criterion that you hit

Within the category, it is really difficult to spell out a clear winner as each bank’s term and conditions [T&C] differs from one another You will really have to decide for yourself, based on your current situation, which bank’s T&C suits you the best.


Be very careful about the T&C as certain banks only provide a bonus interest rate that is temporary of nature – i.e 12 months – which would inflate their nominal interest return for the first year during your comparison.


Pros of savings account:

  • Higher interest rates

  • Flexibility

Cons of savings account:

  • Cap on bonus interest rate (usually $50,000 - $70,000)

  • Hassle to fulfill the criteria

  • Interest rates may be lowered at the bank’s discretion

To find out which is the best savings account in Singapore that suits your need, visit Seedly here.


For the purpose of this article, I will be using Bank of China as the representation for this category with an assumed salary credit of less than $6,000 and spending of less than $1,500 a month. The prevailing interest rate would be 0.9% for the first $80,000 and 0.4% For the next $920,000.

Investments and Insurance criteria will be excluded as, from a financial planning perspective, it is not a smart move to base your insurance and investment decision on temporary bonus interest rates in a savings account. (if you’ve done that, god bless you)


Fixed deposits

Realistic Annual Return Rate: 0.65% to 1.50%


Gone were the glory days of 2% fixed deposits promotion. These days, fixed deposits yield a return up to 1.5%.


The interest rate differs in terms of the amount and duration of the deposit.


For fixed deposits that are available as of Sept 2020, the highest interest rate offered by Maybank which stands at 1.50% per year locked in for 3 years for amounts above $25,000.


For the context of this article, I will be applying the Maybank rates and assuming that it remains constant throughout my calculations.


To find out which bank provides the highest interest rate on their fixed deposit, visit MoneySmart here. Short-term Endowments (Non-Promotional)

Realistic Annual Return Rate: 2% to 2.1%


In the industry, there are two types of short-term endowments – participating and non-participating.

In terms of policy duration, participating policies are around 8 – 10 years, whereas, for non-participating policies, the duration is usually 5 years.

In terms of premium term, both participating and non-participating policies are usually limited to 2-5 years of payment.

In terms of total returns, participating policies have higher returns than non-participating policies – then again one may argue that it is justified to compensate for higher lock-in duration.

In terms of guaranteed returns, non-participating policies outperform participating policies' hands down.

An example of a short-term endowment comparison is as follows:

For the context of this comparison, we will be using non-participating policies with policy term lower than 5 years as frankly, any period of above 8 years really isn’t short-term anyways. For funds that are to be used for second and third-year premium, I will assume a normal base savings rate of 0.10% (from B.O.C.)

To find out which is the best short-term endowment at the moment, get in touch with me here.

Short-term Endowments (Promotional)

Realistic Annual Return Rate: 1.05% to 2.00%


Every now and then, insurance companies will come out with short term endowments promotions which provide a decent amount of guaranteed returns a year.


Pros of Non-participating short-term promotional endowment:

  1. Relatively straight forward

  2. Decent guaranteed return rate per year

  3. The return rate is fixed over the tenure

  4. The maximum amount may go as high to $1 million

  5. Minimal Terms and Conditions

  6. Insurance coverage of 105% premiums paid (but frankly who cares right)

The of Non-participating short-term promotional endowment:

  1. Lock-in period of usually 3 years

  2. Sells out freaking fast (within hours of launch – not even kidding)

  3. Single premium

  4. The minimum amount of usually $20,000

If you wish to be notified of such promotions, even before the tranche is officially launched, I will suggest that you join my telegram channel where I update and communicate to my clients and readers: https://t.me/updatesfromdaniel

For the purpose of this article, I will be using China Taiping i-Save as the representative of this category. The guaranteed interest a year is 2.05% for 3 years. The reinvestment rate will also be assumed at 1.5% a year after the 3rd year – with the assumption of putting it in a fixed deposit given the similar nature of the instruments.


Non-participating Universal Life Plan

Realistic Annual Return Rate: 1.00% - 2.50%


Another notable category that has been gaining popularity over the months is the rise of non-participating universal life plans that are designed to behave like a “savings account”. These are sold by insurance companies.


How does it work?

  • The plan automatically renews every year till age 100

  • Negligible insurance coverage

  • Provide guaranteed credit rates (a.k.a interest rate) for the first few years of up to a certain amount

Pros of universal life plans:

  • Crediting rates are usually guaranteed for the first few years

  • High flexibility in withdrawals (depending on contractual wording)

  • Loyalty bonus may be provided after certain policy years

Cons of universal life plan:

  • Crediting rates are not guaranteed after the first few years

  • Crediting rates for top-up is not guaranteed

  • The maximum account value that is permitted or entitled to the bonus interest rate is low

  • Penalty or termination may occur upon the inability to maintain account value

  • The minimum account value can be changed anytime at the insurer discretion

Notable providers in this area include:

For a comparison of the insurance saving plans, you can visit seedly here.

For the sake of the analysis, Singlife will be used as the representative of the category as it has the highest maximum account value cap of $100,000, unlike other providers that cap the amount to be at $20,000. For the amount on top of $100,000, I will assume a return rate of 0.40% per annum, assuming that you put it into the BOC savings account.


Singapore Government Savings Bond

Realistic Annual Return Rate: 0.26% to 0.90%

Singapore Government Savings Bond is the type of government bond that behaves like a savings account. When held till maturity, it provides the return of a 10-year government bond while enabling the bondholder to withdraw as and when you need with a $2 transaction fee.


Personally, SSB was my go-to in the past, with an IRR of 2-3% without sacrificing any liquidity, it truly was the best short-term saving instrument. Currently, with the given interest rate, SSB is really not worth considering as there are better alternatives out in the market.


For the context of the article, I will be applying the rates of SSB for Sept 2020. As interest of SSB is paid out, they will not be reinvested and instead, I will be applying the normal base rate of 0.25% on the interest earned.


Money-Market Fund / Cash Management Account

Realistic Annual Return Rate (after cost): 0.41% - 2.20%


Another instrument that has been growing in popularity is the use of money market funds or cash management account by Robo-advisors.


How does it work - It is a collective investment scheme that utilizes the funds to invest in short-term investment-grade bonds or treasury bills


Pros of money-market fund:

  • Flexibility in withdrawals – as it is considered to be a form of direct investment

  • Decent interest return – depending on the underlying funds

  • No or low minimum balance - depending on the provider

Cons of money-market fund:

  • Capital and returns are not guaranteed and subjected to market forces

  • Cost of investment will erode performance

Personally, I do not view MMF and Cash management account to be a saving instrument due to the nature and risk of the instrument.


However, if you are interested in considering this instrument for the purpose of your short-term savings, you can refer to a comparison done by seedly here.

For the sake of the analysis, I will be using StashAway Simple as there is no minimum balance required and provides a net projected return of 1.40% per year.

TLDR: Long story short

Personally, for my

  • Expenses, I will park the funds in the savings account

  • Emergency funds, I will park the funds in either a savings account or non-participating universal life policies because of the flexibility

  • Short-term savings (1-5 years), I will park the funds in promotional endowments

For a horizon of above 5 years, you may want to consider investments as an option. With interest rates at such low levels, investing had become a necessity rather than a luxury.


As consumers, we cannot afford to just idle our savings and watch it get eroded by the inflation rate over time. There is a sense of urgency to put our savings to work if we want to achieve our financial goals in the next 10-20 years.


If you would like to get started but do not have the time or knowledge to create and manage your investment portfolio in accordance with your financial plans, you can reach out to me and we'll work something out together!

Stay safe and I hope to hear from you soon.


Do follow my telegram channel to keep up with future promotions and market updates:


Do share the article with your friends and family who's complaining about the recent decrease in interest rates and need to see this.


Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides advice in the following areas:

  • for investment and portfolio management advice - find out more here

  • for insurance planning and portfolio optimization advice – find out more here

  • for retirement planning advice– find out more here

Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore

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