The Singapore Savings Bonds (SSBs) will be launched in the second half of 2015. These are new government bonds sold only to individual retail investors.
Features of SSBs:
- Issued once a month
- Interest (coupons) is paid every 6 months
- Principal guaranteed
- Maximum term of 10 years
- Minimum investment of $500 in a single lump sum, in multiplies of $500 thereafter up to a cap (to be announced)
- At issuance, rates are fixed based on the prevailing yields of the Singapore Government Securities (SGS) and locked in for each issue
- It will start with a smaller yield that will keep increasing (‘step-up’) the longer an investor holds on to it
- Allowed to surrender half-way through but the interest earned will be lesser than when held till the tenth year. For example, if you surrender after the first year, you will receive only about 0.9% based on the current bond rate. If you stay invested till the full tenure of 10 years, the returns will match that of the 10 years SGS bonds i.e. around 2.15% currently (www.mas.gov.sg, 5th April 2015)
- Flexible redemption – you do not have to decide upfront how long you want to be invested and you can get your funds back within a month, penalty free.
Using the illustration as shown in The Sunday Times on 5 April 2015:
Let’s say you invest $10,000:
- 1st year: 0.9% coupon – $90 for 1st year
- 2nd year: 1.2% coupon – $120 for 2nd year
- 10th year : 3.3% coupon – $330 coupon for 10th year
- If you decide to stop after 2nd year, the total interest (coupons) received is $90 + $120 and NOT $120 + $120.
- If you hold on till the 10th year, the coupon you will get on the last year is $330.
- The payouts before the 10th year will be lesser and that is the reason why the article highlighted that over the 10 years, the bond yield would be around 2.4%, matching the coupon of a 10-year SGS bond.
Savings Bonds Indicative Returns since January 2015
Savings Bonds Indicative Returns for the last few years
A few key things to note:
- Returns is only around 2+% if held till 10th year – in fact it has dropped to less than 2% in the last few years
- Max tenure is 10 years
- Interest is pegged to the issue you bought at the start
- Interest is pegged to 10 year SGS Bonds – it has gone to as low as 1.3% before in 2012
- Bond Yield is based on Simple Interest
Simple interest is called simple because it ignores the effects of compounding. The interest is calculated based on the original principal. i.e. it is determined by multiplying the interest rate by the principal by the number of periods.
- Simple interest = if 2.4% over 10 years, it means for an investment of $10,000, you get $240 every year for 10 years
- $10,000 at 2.4% simple interest, 10 years = $12,400
- $10,000 at 3.3% compounded interest, 10 years = $13,836
Are SSBs suitable for retirement planning?
Some people have asked me whether Singapore Savings Bonds are suitable for retirement planning. They are good alternatives to savings accounts and fixed deposits but I would not recommend them for retirement planning.