There are many saving options available for different goals, risk appetites and saving styles. Between fixed deposits, endowment plans and cash management accounts, it can be challenging to ascertain which one’s right for you.
When it comes to the world of personal finance, it’s undeniably intimidating and confusing to get your bearings at the start. There is so much jargon to know, concepts to understand and critical thinking to master, how does one begin their savings journey?
While fixed deposits, endowment plans and cash management accounts are relatively similar in concept, there are also major differences that determine which is most viable for you. Here are some key fundamentals and insights into them to help you achieve your long-term savings objective.
Table of contents
- What are fixed deposits?
- What are endowment plans?
- What are cash management accounts?
- Deciding which is best for you
Know your different saving options in 2022
What are fixed deposits?
Fixed deposit accounts are low-risk savings accounts with a fixed, guaranteed interest for deposited money over a certain period (tenure), ranging from one week to three years and above.
Typical ranges of deposit sums include:
- S$5,000 to S$10,000
- S$20,000 to S$50,000
- S$100,000 to S$500,000 and above
Over time, your parked sum will earn interest with regular payout options available at quarterly or annual intervals. Other than those payout intervals, the money left in a fixed deposit account cannot be withdrawn before the tenure is up lest you incur penalties.
Penalties here refer to earning less or no interest and being charged premature termination fees. However, with that said, it is possible to regain the initial sum of money invested.
Types of fixed deposits: Short, medium, & long-term
But how are your payouts being calculated? The fixed interest rate for fixed deposits is decided at the beginning of the contract period.
While some banks do offer higher rates for larger deposit sizes, the real determinant is the tenure period — short, medium or long-term accounts. Longer tenure deposits almost always earn higher interest rates, particularly those longer than a year.
As a result, short-term small deposits usually earn lower interest rates while long-term big deposits earn higher interest rates.
Currently, the average interest rate for SGD fixed deposits is around 0.86% p.a.
Here’s a quick calculation example:
Deposit amount: S$10,000 with an interest rate of 0.6% p.a.
Tenure: ½ year or 6 months
Total interest earned: (S$10,000 x 0.006) / 2 = S$30
Evidently, short-term fixed deposits grant you faster access to your money whereas long-term fixed deposits allow you to score higher rates of return over a prolonged duration. Hence, the most suitable fixed deposit account for you depends on the urgency of your timeframe.
Type of fixed deposit: Foreign currency
There is also a fourth category of fixed deposits to address: Foreign currency fixed deposits. It allows you to convert your fixed deposit of SGD into a foreign currency of your choosing. Once the tenure concludes, the foreign funds are then reconverted back into SGD according to your bank’s prevailing exchange rate.
Hence, it’s not guaranteed that you’ll earn back an amount equivalent to your initial deposit. You may incur a loss if the exchange rate depreciates.
Check out our detailed comparison and ranking of Singapore’s 12 best fixed deposit accounts to lock in your savings.
What are endowment plans?
|Premium||The amount you pay for/put into the endowment plan.
Can either be a single premium (one-time lump sum) or a recurring premium (fixed monthly sum).
|Policy term||The tenure of the endowment plan to reach maturity.
Short-term: two to six years
Long-term: 10 to 20 years (or up to fixed age e.g. 75 years old)
|Capital guaranteed upon maturity||Guaranteed return of an initial deposit of money premiums upon reaching the end of policy term|
|Maturity benefit||Rate of return (%) of initial investment sum upon the end of policy term|
|Participating / Non-participating||Participating plans: Investment of premiums into insurer’s fund to receive a bonus based on fund’s performance upon plan maturity.
Participating plans = guaranteed benefit sum + non-guaranteed sum (insurer’s fund)
Non-participating plans = guaranteed benefit sum only
|Insurance coverage||Portion of money channelled into insurance coverage of endowment plan.
Can amount to 101% or 105% insurance benefit in case of terminal illness, disability and/or death.
|Tranches||Endowment plans are limited and time-sensitive.
They are issued in tranches, each containing a limited number of policies and respective rates of returns.
Endowment plans are great alternative savings methods for significant milestones (like university fees, down payment for a home, etc.) or bridging the coverage gap of an existing life insurance scheme or simply topping up extra insurance.
Essentially, an endowment plan functions as a savings/life insurance hybrid product where you pay mandatory premiums (savings contribution) either as a lump sum or every month.
How are premiums calculated?
This premium is calculated based on the amount you intend to collect back upon tenure expiration. Premium values are fixed according to the endowment plan and are not subject to price fluctuations.
This paid premium cost will be split between funding your savings and the insurance coverage of the endowment plan. Usually, the standard life insurance benefit attained will be 101% or 105% of the total premiums paid in the event of terminal disease, disability and/or death.
For endowment plans with monthly premiums, failure to pay on time will result in the policy lapsing. In such cases, this results in premature termination fees and receiving a lower cash value than the total value of premiums you’ve invested thus far.
Can you withdraw money mid-way through the tenure?
Similar to fixed deposits, endowment plans also offer different tenures depending on preference. However, endowment plans are more structured and targeted in that they cater more specifically to an individual’s savings objective, risk appetite and tolerance.
Note: Some endowment plans permit cash withdrawal on certain conditions (e.g. annually). However, this is not a return on premiums paid, but rather a potential deduction from your death benefit.
In general, policyholders are not advised to withdraw money prematurely from your plan. This reduces your plan's final maturity value, resulting in the ultimate net rate of return being lower than initially projected.
For example, Manulife Goal 9 guarantees 1.1% p.a. returns on the single premium paid during the one-year tenure. Any mid-way withdrawal, if allowed at all, will jeopardise those returns.
Types of endowment plans
The maturity date of endowment plans can be as short as four years to as long as 25 years depending on the policy terms (five to 40 years) and premium payment terms (one to 30 years) chosen. Moreover, they also differ depending on your financial goals; be it retirement, education or supplementary income.
This is why many people advise venturing into endowment plans only when you have a clearer objective and timeframe in mind to work towards.
1. Traditional endowment plans
Traditional endowment plans form the large majority of endowment plans in Singapore. They provide a lump sum cashout upon the end of the policy term.
Some of them might offer an annual cash benefit after a certain number of years which proves useful as extra income. However, this is by no means obligatory and you can choose to reinvest this cash benefit into your endowment plan for future higher returns.
2. Retirement (Annuity) endowment plans
Another long-term plan, the retirement endowment plan is useful for those looking to accumulate more money to enjoy their golden years more peacefully and luxuriously.
Under this plan, you will receive a cash payout either monthly or annually. Hence, this is where the goal-setting comes in where you’ll need to choose your retirement age, your premium payment term and how many years the payout will continue.
Over time, the plan can also become eligible for bonuses to channel towards your guaranteed capital or even additional income if the event of terminal illness or disability.
Funds from your Supplementary Retirement Scheme (SRS) may be used to pay for this endowment plan too.
3. Education endowment plans
The education endowment plan is self-explanatory in targeting parents wishing to save funds for their child’s future education costs such as university tuition fees. The child acts as the insured and parents can choose between two policy maturity dates depending on when they want their child to receive the payouts.
In general, there are six annual payouts spread throughout the policy term before and after the policy term matures. Once again, the payouts don’t have to be cashed out but can be reinvested instead.
For parents, there are multiple factors to consider before purchasing an endowment plan for your child’s education. It’s not as simple as just dumping a sum of money to grow passively over time. An endowment plan requires a certain level of maintenance.
Understandably, it can be worrisome but there are many alternative child savings accounts to kickstart their future funds (with better liquidity too for emergencies!).
4. Legacy endowment plans
A legacy endowment plan is a multi-generational savings scheme that ensures your savings funds are passed down to your future generations. It is a life-long investment with the policy only expiring upon your death.
This means that premiums will have to be paid for a designated period until the insured’s death. Ownership of this plan can be transferred to your children as an inheritance if you dictate.
If you’ve made it this far, you’ve probably seen a lot of mention about payouts, but how much returns can one expect? It all boils down to a specific feature of your endowment plan — mainly, is it participating or non-participating?
Participating and Non-participating endowment plans
1. Participating plans
Participating plans will afford you two types of sums upon the end of the policy term: a guaranteed and non-guaranteed sum.
The guaranteed sum refers to a definite 100% capital return of your total premiums paid throughout your endowment plan.
On the other hand, remember how not all your premiums are dedicated to your savings portion? Participating plans will invest some of your premiums into the insurer’s fund on your behalf. This is known as the non-guaranteed sum where you may potentially earn bonuses if the insurer’s fund performs well and earns a decent profit.
These plans tend to be longer-term, with their policy term lasting up to 25 years or at a fixed age.
Pro-tip: Not all endowment plans guarantee a 100% capital guaranteed upon maturity. Look for plans that do.
Good examples of participating plans include Singlife MySavings Plan and Great Eastern Flexi Cashback.
2. Non-participating plans
On the flip side, there is less risk associated with non-participating plans since you’ll definitely receive your guaranteed sum. These plans also tend to be more short-term in nature, with their policy term lasting only a few years.
Good examples of non-participating plans include GREAT SP Series 6 and Tiq 3-Year Endowment Plan.
Check out our 2022 roundup and explanation of some of the best short and long term endowment plans to find in Singapore.
Build your investment portfolio with knowledge and confidence. Follow our step-by-step beginner's guide to start now!
What are cash management accounts?
Last but not least, we have cash management accounts. Seeing that many traditional bank savings accounts have dramatically fallen in interest rates, it’s no surprise that many Singaporeans have been scrambling to find more high-yield and sustainable methods to cultivate their savings while still retaining fund liquidity.
This was where robo-advisors came into the picture to deliver the new concept of cash management accounts (or solutions).
One of the earliest examples was StashAway Simple (1.5% p.a.) which was introduced in November 2019. All these cash management accounts have since skyrocketed in popularity as the answer to our prayers.
However, perhaps the key highlight of cash management accounts is using a variety of investment portfolios like ETFs, REITs, equities and other securities to build savings.
In a nutshell, they have combined the features and convenience of everyday banking and interest-earning opportunities all into one.
Here’s an overview of the benefits of cash management accounts:
1. Earning decent interest
Cash management accounts offer high-yield interest rates (like 1.5% p.a.) comparable to online savings accounts.
2. High liquidity
You’ll never have to worry about your funds being locked away in times of necessity or emergency. You can freely withdraw and deposit cash whenever you please.
3. Great investment practice
Since cash management accounts are operated by robo-advisors, it’s easy to transfer your funds around different investment portfolios quickly and efficiently. This streamlines the process of automating your investments to capitalise on time-sensitive investment prospects almost immediately.
4. Little to no maintenance fees, only fees on investments
Most traditional savings accounts tend to charge a monthly maintenance fee or require users to jump through multiple loops to reap benefits.
In contrast, cash management accounts are more straightforward with minimal to no fees. They usually only charge fees for investment transactions themselves.
For the inside scoop of our personal opinion and ranking, take a peek at our comprehensive 2022 cash management accounts review.
Fixed deposit vs. Endowment plan vs. Cash management account
Now, a lot of material has been covered about these three types of savings schemes, but just which one is the best?
We think it’s firstly important to acknowledge that there’s no one-size-fits-all approach to saving and accumulating wealth.
For those who prefer…
- A shorter-term, temporary account to store your money
- Low risk, semi-flexible plan with guaranteed returns
- Potentially saving in foreign currency
Answer: Fixed deposits
This is because fixed deposits possess relatively low barriers to entry in terms of initial deposits starting from as low as S$5,000. Also, it does offer slight flexibility in liquidity where you can receive payouts either quarterly or annually over time. Lastly, if you’re confident in playing around with the forex market, who’s to stop you?
For those who prefer…
- A more structured approach to long-term saving
- Need to supplement/close up a money gap in pre-existing life insurance plan
- Greater risk tolerance
Answer: Long-term endowment plans
This is great for hitting milestones or an endgame in mind because some long-term endowment plans can project as far ahead to your death. It allows you to plan for your financial future based on set goals.
Plus, it doubles up as extra life insurance benefits for terminal conditions, disabilities and death. Lastly, it also allows you to earn an additional rate of returns through the insurer fund’s profits.
For those who prefer…
- Higher interest rates
- Need high liquidity for easy withdrawals
- Investing savings rather than idly storing it
Answer: Cash management accounts
Cash management accounts are the true saving/investing hybrid for the 21st century, financially-savvy adult.
It allows you to kill two birds with one stone by saving money in an account with a high yield whilst investing and managing selected portfolios efficiently. Additionally, there are minimal maintenance fees involved so that’s one less headache to deal with.
Read these next:
7 Things to Consider When Buying Endowment Plans For Your Kids
Best Short & Long Term Endowment Plans in Singapore (2022)
12 Best Fixed Deposit From Top Banks in Singapore to Lock In Your Savings (April 2022)
Best Cash Management Accounts In Singapore To Soup Up Your Savings (2022)
Take This Before You Go: A Must-Read Guide for Budding Investors