Things you must know before you purchase any savings plan
As Singaporeans, we were all taught the importance of saving since young. But while many of us are hardworking savers, very few of us are smart savers when it comes to the “what to save in” equation.
The purpose of this article is to give you a crash course on the savings plan in Singapore and also the considerations you should have when you’re deciding to commit to one.
For the context of this article, the savings plan I will be referring to is the plans offered by insurance companies only. The instruments offered by banks and other financial institutions will not be discussed in this article.
Start with the end in mind: What are you saving for?
Savings is essentially a form of delayed consumption. By saving, you are delaying the consumption that can be made today for a higher level of consumption in the future.
Most of us are saving not because we want more money, but instead, we are saving because we want to get the things money can buy us. It could be financial freedom, it could be a car, it could be for your children’s university education, the list goes on.
When it comes to saving, we should always define the purpose you are saving for. Once you understood what you would like to spend your future savings on, you will be able to determine:
The thing about saving plans is that the returns are usually very low - 1% to 3% a year – as the plans are lower risk of nature.
That said, blindly savings through a saving plan might not be a good idea as you may not be able to save up to the amount needed for your future financial goals.
What is scarier?
Saving blindly might not provide you with what you need to have at the end of the day.
So, you must understand what you are saving for before you can have a deeper understanding as to how much you should save and what instruments you should be considering.
This brings me to the next part
The different types of savings plan available
To generalize, there are three types of “saving plan” available in the market today, each designed to be used for different purposes.
Universal Life: Universal life “saving” plans are designed to mimic the behavior of a savings account that is provided by the banks. The plan usually provides a high degree of flexibility and a decent interest rate. However, the higher interest rates are limited to the first $10-20,000. As such, it may not be a suitable instrument for people who are dealing with a larger amount of savings.
Endowments: Endowments on the other hand are created to provide a higher return rate than your traditional saving account but are more inflexible as compared to universal life.
Traditional endowments provide life insurance coverage alongside the wealth accumulation portion. This is suitable for savings that “has to be there” regardless of whether the policy owner is dead or alive. Examples of such savings include saving for your children’s future university education fees.
“Modern” endowments, on the other hand, provides minimal coverage and focuses more on the return rate. However, depending on the prevailing rates offered, you may be better off saving your money elsewhere.
Annuities: Annuities are designed for retirement and legacy planning purposes. In any annuities, there will be an accumulation phase (From 0-40 years) and a distribution phase (From 10 years to lifetime payout).
Depending on your needs, you need to have a clear understanding of what is available in the market and what is suitable for you based on how you would like to structure your retirement portfolio.
Long story short (and self-plug)
To truly understand what type of “savings” plan you should be considering, you must have a clear understanding of yourself and:
What are you saving for – yourself? Your family? Retirement?
How long do you have to save?
How much do you need to save?
How much can you save based on your current situation?
What is the return rate you will need to have to achieve your saving goals?
Once you have established your needs and the surrounding constraints, you can then narrow the suitable instruments that could provide you with the returns and performance you need to achieve your saving goals.
After narrowing down to the suitable instruments, the next step would be to identify the right company that provides the “best” product that you are looking for – in terms of benefits and cost. This requires you to be adept at the different company’s product which, unfortunately, not many of us are.
Here comes the self-plug.
As an Independent Financial Advisor Representative, I am best positioned to:
Help you crystalize and quantify your saving expectations and goal
Tailor an implementation plan that helps you achieve the goals
Compare and evaluate the different instruments and products available to you
If you do not have the time, interest, or know how to identify the right type of instruments you should be considering as well as do the market research to compare the products across the different companies, you can reach out to me via telegram and WhatsApp and we’ll see what we can do together!
Also, join the telegram channel to keep up with future updates :)
I'll be updating my article: The Ultimate Guide On Short-Term Savings In Singapore next week to account for the decrease in interest rates.
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
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