Which is better for you: Savings account vs Endowment vs Fixed deposits vs SSB
Introduction (last updated: April 2020)
Looking for places to park your cash savings but not sure of which instrument is better?
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. 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.
The different instruments that we will be talking about will be:
Promotional short-term endowment
Non-promotional short-term endowment
Singapore Government Savings Bonds
Money market funds
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 this category of instruments truly to park:
Emergency cash savings
Short-term cash savings (1-5 years)
That is because the general trade-off for short-term saving instrument usually comes in the form of flexibility (e.g. lock-in/T&C) and interest rate.
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.
Begin with the end in mind:
Promotional endowments is always a clear winner among the different instruments
Multiplier accounts may be a good consideration for an amount below $50,000
For amounts above $50,000, promotional endowments or fixed deposits will provide higher returns
Non-promotional endowments under-performed fixed deposits due to to the fact that the funds are not deployed immediately and is spread across multiple years thereby resulting in loss of interest earned.
Personal Comments and Comparison
Savings account (e.g. multiplier account)
Realistic Annual Return Rate: 1% to 2.6%
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.
Personally, I’m not a fan on multiplier account as:
1. There’s a cap on the bonus interest of usually $50,000 - $70,000 (which is not a lot)
2. So many darn criteria to hit which is troublesome
A quick summary of the different savings account:
For a more detailed comparison, 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 1.95% for the first $60,000 and 1% For the next $940,000.
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)
Short-term Endowments (Promotional)
Realistic Annual Return Rate: 2% to 2.3%
Every now and then, insurance companies will come out with short term endowments promotions which provide a decent amount of guaranteed returns a year.
The pros of such policies are that:
Relatively straight forward
Decent guaranteed return rate per year
The maximum amount may go as high to $1million
Minimal Terms and Conditions
Insurance coverage of 105% premiums paid (but frankly who cares right)
The cons of such policies are that:
Lock-in period of usually 3 years
Sells out freaking fast (within days of launch – not even kidding)
The minimum amount of usually $20,000
A quick look at the previous offerings is as follows:
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 on a regular basis: https://t.me/joinchat/AAAAAFVEzUiPA4IgQEm4vA
For the purpose of this article, I will be using NTUC income’s capital plus as the representative of this category as they were the most recent company to launch their promotion (24 – 31 May). The guaranteed interest a year is 2.13%.
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 normal base savings rate of 0.25% (from B.O.C.)
Singapore Government Savings Bond
Realistic Annual Return Rate: 0.96% to 2.3%
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 WITHOUT any penalty.
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.
Historical interest rates of SSB by InvestmentMoats.
For the context of the article, I will be applying the rates of SSB for May 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.
Realistic Annual Return Rate: 1.4% to 1.75%
Gone were the glory days of 2%+ fixed deposits promotion. These days, fixed deposits yield a return of around 1.4% to 1.75%.
You may find 2%+ fixed deposit depending on your total deposit amount as well as your tenure but based on the comparison done out by Moneysmart.
For the current fixed deposits promotions available as of March 2020, the highest interest rate offered by Maybank which stands at 1.75% per year locked in for 2 years up till maximum deposits of 1million dollars.
For the context of this article, I will be applying the Maybank rates and assuming that it remains constant throughout my calculations.
Realistic Annual Return Rate (after cost): 0.5% - 1%
For short-term saving purposes, money market fund is generally not recommended as the returns after fund management fees are negligible. It is meant to be a temporary instrument to park your investment fund before deploying the funds based on your investment strategy.
As such, I will not be providing a comparison for Money market funds as I do not think it is the right instrument to be considered when thinking about short-term returns.
Long Story Short
Personally, I would make use of savings account to park my savings needed for expenses and emergency savings needs as these are typically below the bonus interest cap of $50,000 and have required a high level of liquidity.
For funds above $50,000, I would park it in promotional endowments – depending on the availability – if not fixed deposits.
For a horizon of above 5 years, you may want to consider investments as an option – provided you have a clear picture of your own financial and investment plans in the first place.
If you do not have the time to quantify your expectations or goals, come out with an actionable plan and compare the market to filter out the best instruments to be included in your portfolio, you can consider engaging my professional financial planning services.
Stay safe and I hope to hear from you soon.
P.S. if you wish to be updated with market information or promotions, do follow my telegram channel here: https://t.me/joinchat/AAAAAFVEzUiPA4IgQEm4vA
Daniel is a Licensed Financial Consultant with MAS and a certified Associate Wealth Planner, who specializes in retirement and investments planning. 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 a financial advice
This advertisement has not been reviewed by the Monetary Authority of Singapore