Why are Singaporeans lining up for fixed deposits when they can get better interest rates elsewhere?
Fixed deposit rates have started to increase with promotional rates as high as 2.6% for a one-year term. In fact, it created news about long queues at banks.
In today’s environment of rising inflation and rising interest rates, everything seems to be more expensive (including our mortgage payments for those of us with variable rate bank loans). However, one advantage is that we can get better interest rates on our savings.
Despite the popularity of fixed deposits as evidenced by the long queues, there are other avenues for our savings that can offer similar, if not better, interest rates. So why are Singaporeans still lining up for term deposits?
Read also : A Beginner’s Guide to Fixed Deposits in Singapore
Fixed repositories are easily accessible and familiar
Offered by many traditional financial institutions (FIs) such as banks, term deposits are a staple for Singaporeans, including the older generation or those who are not as financially savvy. Chances are if you are a Singaporean you already have at least one bank account (probably one of the top 3 banks: DBS/POSB, OCBC, UOB) and know that banks offer fixed deposits.
Fixed deposits are also a relatively simple financial instrument to understand – you put your money in a fixed deposit, lock it in for the stipulated period and earn higher interest instead of putting it in a savings account or holding it in species. This simplicity, coupled with its familiarity, makes Fixed Deposits an easy choice for investing your money (with sufficiently attractive interest rates).
The Big 3 banks in Singapore, as well as other banks and financial institutions, all offer term deposits, making them accessible to Singaporeans. Just walk into any bank branch and you can make a fixed deposit as long as you have the necessary funds. There are very few prerequisites needed to place a fixed deposit, no need to complete a KYC process (if you already have a bank account) or an investment risk profile.
Fixed deposits are safe
For savers who can’t tolerate any volatility, fixed deposits are a safe way to earn slightly better returns than simply holding their money. They offer guaranteed returns. Your principal capital is protected and returned at the end of the mandate.
Fixed deposits are also protected by the Singapore Deposit Insurance Scheme which insures up to $75,000 per depositor for deposits with all full-service banks and financial institutions. This adds to the perception of security that fixed deposits have in the minds of Singaporeans, especially among older generations.
However, note that this protection only applies to $75,000 per depositor. This means that if your funds with the bank (including savings account, checking account, and fixed deposit accounts) exceed $75,000, the amount exceeding $75,000 is not protected, in the case few probable bank failure.
You can place fixed deposits online
At first glance, one might think that the promotional rates offered only concern physical placement, which has led to long queues. However, the fact that may confuse savvy digital banking users is that promotional rates are also available to those who place their fixed deposit online through online banking.
There is no need to queue outside UOB to request the promotional fixed deposit of 2.6% per annum when you can make the same request online via internet banking in less than 10 minutes.
The presence of bank teller staff should not be overlooked as a factor that makes term deposits a popular investment instrument among less digitally literate groups of people.
Other alternatives for safe investments that yield the same or more than fixed deposits
Apart from fixed deposits, there are other investments that also offer guaranteed capital and returns – you can check out our article on 6 investments in Singapore that provide guaranteed capital and returns
Of these, here are the ones that are also familiar and safe for the everyday Singaporean.
Singapore Savings Bonds (SSB)
The current oversubscription of Singapore Savings Bonds (SSBs) is a testament to their popularity with Singaporean investors.
For the October 2022 issue, the SSB is offering 2.6% pa for its first year and up to 2.75% for the 10-year hold. This interest rate is comparable, if not better, to some of the fixed deposit promotional rates.
Backed by the Singapore government, investing in SSB is virtually risk-free. Interest payment is paid every 6 months and we can withdraw without penalty with one month’s notice. This makes SSB more flexible than term deposits, as we would incur penalties for early withdrawal of term deposits.
We can also start investing in SSB with as little as $500. On the other hand, some fixed deposits require investments of at least $20,000 to benefit from the most attractive promotional rates. However, the downside is that there is a maximum limit of $200,000 that we can invest in SSB, while there are no such limits for fixed deposits.
We may also invest in other government investments such as Treasury Bills and Singapore Government Securities, which also offer guaranteed capital and returns.
Read also : Should you invest in SSB for its 1-year interest rate or its 10-year average yield?
Top-ups to our CPF accounts also earn between 2.5% and 4% interest per year, depending on which account is topped up.
Again, backed by the Singapore government, we are assured of principal and interest when using the money to do CPF top-ups. However, the obvious downside is the lack of cash flow flexibility. We can only start withdrawing money from our CPF accounts from the age of 55 if we meet the withdrawal conditions.
However, if our intention is to compound long-term interest (for retirement), doing CPF top-ups can be an attractive option, especially when we top up our special account which earns 4% interest per year.
Read also : How much will a 30 year old have in their special CPF account at age 55 by maximizing the RSTU program each year
In addition to the investment options mentioned in 6 Singapore Investments That Offer Guaranteed Principal and Returns, we may also wish to consider other options if our concern is to earn higher interest while maintaining cash flow.
For maximum cash flow flexibility, we may place our savings in high interest savings accounts. Instead of a basic bank account we can open which gives us the opportunity to earn higher interest rates. For example, if we meet all bonus interest requirements for OCBC 360, we can theoretically earn up to 4.05% interest per year. However, this may not be realistic for most people. Either way, even meeting some of the bonus interest criteria would give us better returns than just leaving the money in a basic bank account earning a base interest rate of 0.05 % per year.
Read also : [2022 Edition] Best Savings Accounts for Working Adults in Singapore
Alternatively, we can look at cash management accounts that invest in money market funds. They allow us to obtain a higher interest rate by taking a slightly higher investment risk. Similar to bank accounts, they also allow us to withdraw our funds without any blockage.
Although they may offer slightly better interest rates than savings accounts, they are not protected by the same Singapore deposit insurance scheme that insures bank deposits. They also carry a low level of risk as they invest in money market funds which are always affected by market volatility despite their relative stability.
Read also : Complete Guide to Cash Management Accounts in Singapore
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