More details have been released with regards to the Singapore Savings Bond. Here is a quick and very simple summary:
1. Person must be at least 18 years old, have a bank account (DBS, POSB, OCBC or UOB) and a CDP account.
2. Application for the bond will be through the ATMs (DBS, POSB, OCBC or UOB) or internet banking (DBS and POSB only). Fees will be charged by the banks for application and redemption requests.
3. New Savings Bond to be issued every month. Application and requests for redemption must be done before the window closes 4 working days before end of the month. Must be in multiples of $500.
4. Application amounts of $500 to $50,000 are allowed but each person can only hold a maximum of $100,000 of Savings Bond at any one time.
Quite obviously, the Savings Bond (just like the CPF) is not created with HNW individuals in mind.
It is meant to help the average Singaporean who is more of a saver and who wants a safe place to park his savings which will reward him with a higher interest rate compared to a paltry 0.1% paid by some banks for money in savings accounts now.
I must first state the obvious and that is the Savings Bond is a better place to park our savings than a regular savings account if we have more liquidity than we need on a monthly basis. The most obvious reason for saying this is the much higher interest rate.
Although the Savings Bond is not as liquid as a regular savings account, it really is not too bad. The minimum lock up period is basically one month.
We could apply for a savings bond this month, receive it next month and if we decide that we need the money back, we could request for a redemption and get the money back in the following month. We would be paid a pro rated interest income based on the coupon for a holding period of 1 year (which is 0.9% per annum based on an example given by the MAS). We will not suffer any loss of capital in the process either.
If the holders of these Savings Bonds would like to get higher interest rates, they must hold the bonds for longer periods of time. How does this work?
If someone should hold it for the full one year before redemption, he could enjoy a coupon of 0.9%. If he should hold the bond for another year, in the second year, he could receive a coupon of 1.5% (using the example given by the MAS earlier). So, on average, it would be 1.2% per annum which is the coupon for a 2 year bond.
The coupon for each following year steps up until the 10th year and the average coupon for each of the 10 years could be 2.4% (which is the coupon for a 10 year bond around now).
In my earlier blog post on the Singapore Savings Bond, I said that it does not seem very attractive for me, the operative word being "me". When I said I have reservations about it and that I don't really like it, I was thinking about me. OK, why did I say what I said?
For a while now, I could get higher interest rates from fixed deposits offered by the banks and I feel that interest rates will only go higher in future. So, for example, one year or so ago, a 13 months fixed deposit in UOB was offered an interest rate of 1.08% p.a. Today, the offered interest rate is 1.45% p.a. This is a big increase in a year.
Of course, we must note the following points about the fixed deposits:
1. Minimum amount required is $20,000.
2. No interest will be paid in case of early redemption.
So, logically, for someone who has less than $20,000 to be deposited or who might need to make an early redemption in case of an emergency or opportunity (depending on whether the money is in his emergency fund or war chest), if $20,000 is all he has, this option is out.
However, if someone has quite a bit of spare cash, then, whatever liquidity is not required for the immediate future, fixed deposits with higher interest rates might make more sense than the Savings Bond in terms of returns. Just remember to have the fixed deposits in tranches of $20,000 (or whatever is the minimum sum required by the bank).
The Singapore Savings Bond is a good thing to have as it allows people to get higher interest rates for their savings with as little as $500. The very short minimum lock up period with no risk of capital loss are favourable points too.
Whether the Savings Bond is the best option for us, however, would depend on our circumstances, our motivations as well as the alternatives available to us.
Added (3 Feb 2017):
Singapore Savings Bond (Part 3).