Asked on 27 May 2020
I would like to find out more as I am interested in having a savings plan.
A savings plan sacrifices liquidity for guarantees. You have to make a commitment to paying the premiums over a number of years, and thus it has to be a comfortable amount within your budget.
In exchange, if you hold to maturity, you get a guaranteed maturity value, plus potential upside from non guaranteed returns. Naturally, due to the profile of the investment allocation, it won't be the same level of returns as a pure equity portfolio, but this is also not an apple to apple comparison either.
Savings plans can be a decent vehicle if you have a time bound commitment whereby funds must absolutely be ready without any risk. The easiest example is education. If your child was going graduate from university this year with a loan due, would you have a $50K maturity proceed payout to you, or be forced to liquidate your stock portfolio that's down 30% from what you expected?
No strategy/asset class is perfect. Know the product and you will know if it fits your needs, even if you only need it years later.
The downside in general is a lock-in period. You need to evaluate whether you can commit to the lock-in. Some savings plan have a range of lock-ins so you need to see which fits into your time horizon.
Financial planning is an integral part of life. You can reach me here to find out more.
There's a downside to every investment!
if you're expecting astronomical returns, this definitely isn't for you.
if you have issues with putting aside money for the future for at least 10 years, this may not be suitable for you either!
if you have something you're saving towards, eg. Your child's university education fund, make sure it pays out when you need it to.
things to note: make sure your plan works for you.
some provide liquidity with a cashback feature at the cost of lower returns
some have an open ended feature that can be withdrawn after a lock-in period eg. 15 years
some only pay out at that particular year and you have to take it out regardless of whether you need it or not
some Have a limited pay feature (pay for 5 years but withdraw at 15th year) which % wise, have slightly better yield than the full term of paying (Paying 20 years and withdrawing at 20 years)
The only 'downside' of an endowment plan (aka savings plan) is the 'lock-in period' which is the duration of the policy.
Though there are policies that allow you to withdraw partial of the money before maturity such as Prudential etc, withdrawing of the 'cash benefits' will cause a huge drop in your returns at maturity.
Do take a read at the following article which talks about the returns of endowment plans. Honestly, to me I felt that its not worth it.
You give up liquidity for guarantees into the future. Endowments are vehicles to insure your wealth. Something which other asset classes cannot match due to the financial safeguards in place for insurers in Singapore. They have very good structural benefits which cannot be replicated by bonds or other asset classes due to the very nature of the legal treatment on payouts upon certain events like death or disability.
They are an extremely important part of a cohesive financial plan, which is often underminded due to their rightfully lower returns as compared to other asset classes.
They are often suitable for guaranteed events that will occur in your lifetime. Kid's education as well as retirement income are very well suited for endowments/annuities.
You can toggle with the calculator here to see the outcome differences in having endowments versus straight equity:
Generally for endowment savings plans, you need to be able to commit to the full policy period in order to reap the maximal reward. Of course, some of the plans in the market issues coupons that you can withdraw along the way.
Before you get a savings plan, you need to know your goal. For example, it could be to save up for your property in 10 years time, or for retirement planning purposes.
After we have set a goal and know the type of plan to get, it is time to scrutinise the participating fund. This is because your premium will be invested into the insurer's participating fund. Above all, it is responsible to generate the returns for your plan.
I have explained further on a participating fund and how to make your choice (in the link). Above all, not all plans are the same. Therefore, it will be important to understand the details and make the right decision.
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