Are Singapore Savings Bonds really worth buying?

Jul 24, 2015 12.00PM |
 

by Ryan Ong

NO one foresaw the introduction of Singapore Savings Bonds (SSBs). These are actually innovative products, and innovation and finance normally go together like fried butter and a heart patient’s diet. The big question is, why buy a bond that fares worse than your CPF?

 

What are Singapore Savings Bonds?

SSBs are a form of government issued debt. In effect, the Singapore government borrows money from willing lenders, and promises to repay them with interest at a given date.

Yeah, your eyes are glazing over and I haven’t even gotten started. It’s more interesting than you think, because this is potentially money in your pocket. Here’s how it will work:

When you buy a bond, you get money in two ways. The first is through interest repayments, in the form of the coupon. In the past, you would literally tear coupons off bond certificates and trade them in for cash. It was hilarious when someone dropped one down a drain grate. These days the coupon is digital.

The second way you get money is the pay-out when the bond matures – this is when the bond issuer (in this case the Singapore government) repays the debt in full. So if you have a bond for $5,000 that matures in 10 years, you get $5,000 at the end of 10 years, along with whatever you’ve made from the coupons.

SSBs are a little different from regular bonds, in that:

  • SSBs can be “cashed out” before the maturity date
  • The coupon grows each year
  • SSBs have an unusually low minimum investment

 

  1. SSBs can be “cashed out” before the maturity date

With most bonds, your money is stuck until the maturity date. A five year bond means it pays out in five years, a 15-year bond pays out in 15 years, and so forth. But SSBs are different.

While SSBs are technically 10-year bonds, you have the option cash out any month within those 10 years. There is no penalty for doing this – you will get your principal back, plus whatever interest you earned.

 

  1. The coupon grows each year

For most bonds, the coupon rate is fixed – you can expect the same interest repayments until the bond matures. For SSBs however, the bond coupon steps up every year.

This ensures that, whether you wait the full 10 years or cash out earlier, you would earn just as much interest as if you had invested in other Singapore Government Securities (SGS).

(SGS produced returns of around two to three per cent per annum over the past decade.)

The exact details on how the bond steps up will be available in the second half of this year.

 

  1. SSBs have an unusually low minimum investment

SSBs are designed for regular Singaporeans, because a financial institution buying these is like a property developer buying Lego blocks.

You only need $500 to purchase a SSB, and can apply to buy a maximum of $50,000 worth at one go. You can hold a maximum of $100,000 worth of SSBs.

 

But can SSBs make you real money?

Over the course of 10 years, SSBs will produce returns of around two to three per cent per annum. That’s impressive, compared to banana money after WWII.

You would actually make more money just opting for a voluntary CPF contribution, since your Ordinary Account grows at 3.5 per cent per annum.

So, that means SSBs suck right?

Only if you think of them as investments. But that’s not what SSBs are really for.

SSBs, as the name implies, are for savings – they’re a secure place to park your money, while still keeping it within arm’s reach.

So you could make a voluntary CPF contribution and get a higher interest rate – but then you can’t touch that money again, until you’re buying a house or reach your draw down age. With SSBs, you can take the money out any month you need.

There is also the issue of security. Sure, you’d potentially make a lot more if you bought, say, corporate bonds instead. But those don’t have the backing and assurance of the Singapore government.

 

SSBs are a great replacement for fixed deposits

Assuming SSBs work as described, they’re a solid replacement for fixed deposits.

At present, SSBs deliver higher returns than fixed deposits, and have more flexibility*. Of late, banks have begun adapting by raising interest rates on their fixed deposits. Some banks, like OCBC, now have interest rates of 1.5 per cent on fixed deposits. Previously you would be hard pressed to find rates of 1.25 per cent for fixed deposits.

However, many banks require a big minimum deposit to get good rates (minimum deposits can be as high as $10,000 to $25,000, in order to secure rates of one percent or above), so the less affluent may still find SSBs a more accessible choice.

(*SSBs give you the option to cash out every month, while still retaining whatever interest you’ve earned. With fixed deposits, you will usually lose the accrued interest if your make an early withdrawal).

 

SSBs are ideal if your near-future plans are murky

Sometimes, your near future is too muddled for simple planning.

Maybe you’re considering migrating in the next 10 years, but you aren’t sure. Maybe your health is bad and you are no longer insurable, so you need an accessible emergency fund. Under those circumstances, it’s a bad idea to pick a financial product that would lock your money in. You need to be able to get at it quick.

But at the same time, you can’t just leave the money to stagnate in a regular savings account. Inflation could effectively cost you thousands of dollars over the next 10 years.

SSBs provide an ideal solution: you’ll still earn some interest, but you’ll also be able to withdraw your money on short notice.

 

SSBs are good for the elderly and retirees

SSBs are low risk compared to stocks, actively managed funds, and corporate bonds. This is important in your twilight years, when emphasis should shift from making money to protecting it.

Retirees and the elderly could consider shifting money here from riskier investments (talk to a qualified financial adviser first), and should consider SSBs in place of fixed deposits.

 

Would you buy SSBs? Comment and let us know!

 

 

Featured image from Flickr user 68751915@N05.

If you like this article, like The Middle Ground‘s Facebook Page as well!

For breaking news, you can talk to us via email.