Time for a health check for your savings

2020 has turned out to be a year to forget, as a pandemic wreaked havoc on economies, jobs, health and lives. Against this backdrop, it is tempting to let personal financial planning fall by the wayside.

For now, you may be unable to maintain or increase your regular savings commitment. Still, there are ways to eke out savings on your various investment and insurance plans, or on your taxes, which will help in managing your cash flow and generating a higher net rate of return. Here is a checklist:

Revisit your insurance needs

If your children are adults and working, you may not need as much insurance as you may believe. It is always a good practice to review your protection plans at least annually. If you have a financial adviser, he or she will be able to advise you on dependents including elderly parents that you may need to provide for should something unforeseen happen to you.

If you are young and healthy, consider switching out of whole life plans in favour of term assurance or pure protection. Typically, the cost of such cover is a fraction of a whole life plan. While term assurance does not have any cash value, you should be able to obtain a plan that covers till age 100.

Based on rough figures from www.comparefirst.sg, a 45-year-old male will pay around S$6,400 in annual premiums for a S$1 million death cover till age 99. A whole life plan for S$500,000 sum assured will cost twice as much at over S$12,000. There are also a few options if you are temporarily unable to maintain premium payments, such as a policy loan. However, there are terms attached to such options.

Health insurance

Health cover typically comprises a hospitalisation plan in the form of MediShield Life and a private Integrated Shield (IP) plan. There is also critical illness cover. MediShield Life is compulsory, relatively inexpensive and covers for life. A question that is widely raised is whether you need an IP plan especially in the context of proposed enhancements to MediShield Life. Whatever decision you make, be aware of the nature and limitations of MediShield Life. It is designed as a catastrophic plan for longer hospital stays; treatment is pegged to public hospitals and B2/C class wards. Unlike IPs, MediShield Life is also not designed as an "as charged'' plan. Instead, claimable amount is subject to limits. If you already maintain an IP plan, be aware too of future premiums at older ages.

A private hospital plan may cost as much as S$4,000 a year for ages above 70 to over S$8,000 a year for an 80-year-old. Affordability may become an issue at older ages if your savings are limited and you are likely to have ceased working.

One way to save on premiums particularly at an older age is to downgrade your IP to one for government/restructured hospitals. You may also consider dropping any accompanying riders, which are funded by cash. Downgrading a plan will not need any underwriting. But if you have a pre-existing condition, you may not be able to upgrade your plan subsequently, or take up a rider.

Topping up your CPF

The CPF's Retirement Sum Topping-Up scheme helps members enhance their retirement savings with a higher interest rate and tax savings to boot. For those who make top-ups below age 55, the top-ups go to the Special Account (SA). Top-ups for those over 55 go into the Retirement Account (RA). Savings in the SA and RA earn up to 6 per cent. The tax relief is equivalent to the amount of top-ups made, capped at S$7,000 per year.

More Singaporeans are catching on to the benefits of top-ups. According to the CPF's 2019 annual report, over 231,000 top-ups were made, about 18.5 per cent higher than in 2018. The top-ups in 2019 amounted to S$2.15 billion, about 8.3 per cent higher than the S$1.99 billion in 2018.

If you were born in 1958 or after and have at least S$60,000 in your RA before you turn 65, you will be in the CPF Life scheme, which provides a monthly income for life. The CPF Life scheme is an annuity scheme, likely the most attractive in the market. Many financial planners use the scheme as the basis of plans for retirement income.

It is arguably more attractive than private insurance retirement savings schemes. An article by MoneyOwl compared Aviva's MyLifeIncome II with CPF Life. It found that while there was only a slight difference in premiums for a 40-year-old male, the CPF Life scheme generated significantly more income. At 65 years old, the member would receive an annual income of S$37,000 a year assuming an interest rate of 3.75 per cent, or S$41,000 assuming an interest rate of 4.25 per cent. Under Aviva's scheme, the saver would receive S$17,600 a year from age 65 (assuming a 3.25 per cent return), or about S$29,000 (4.75 per cent rate assumption). Of the yearly payout, just S$4,350 is guaranteed.

Save in the SRS

The Supplementary Retirement scheme (SRS) is a voluntary retirement savings scheme to complement the CPF. Contributions get income tax relief, subject to a cap on personal income tax relief of S$80,000. Investment returns accumulate tax-free and half of withdrawals in retirement are subject to tax. As at December 2019, there were over 185,000 account holders who contributed about S$10.68 billion on a cumulative basis.

The rub is that by far the largest proportion of 28 per cent is in cash, which earns almost nothing. Twenty-six per cent is in Reits, shares or ETFs; 27 per cent in insurance and 10 per cent in unit trusts.

If you are risk averse, there are other options, such as the Singapore Savings Bond and Singapore government bonds, or any number of diversified fixed income funds that invest in a mixture of government, corporate and high yield bonds.

Investments: watch the costs

This is a good time to review the costs embedded in your investments. The CPF has sought to cap costs; earlier this year, funds included in the CPF Investment Scheme were not allowed to levy a sales charge, and wrap fees were capped at 0.4 per cent. The good news is that there are more low-cost choices available, particularly via robo services. Endowus, for example, recently launched its Fund Smart platform, comprising institutional share class and trail-free funds for cash, CPF and SRS savings. There are no sales charges or transaction fees, and all trail fees are rebated. Trail fees are the portion of funds' annual management fees paid to the distributor.

Endowus says the average portfolio costs are 65 per cent lower than the market. Based on its illustration, the effective fee ranges between 0.54 and 1.09 per cent, which includes Endowus' access fee, which starts from 0.4 per cent for CPF and 0.25 per cent for larger amounts of cash. Stashaway's fee for assets under management ranges between 0.2 and 0.8 per cent, on top of ETF fees.

If you prefer the comfort of investing via a bank, you may also consider robo-hybrid portfolios from banks such as DBS and OCBC. Please check if the portfolio fee is all-in, or whether it excludes underlying fund fees.

DBS' digiPortfolio charges an all-in fee of 0.75 to 0.85 per cent, which includes underlying ETF/fund fees. OCBC's Roboinvest will charge an annual service fee of 0.88 per cent, not including the fees of underlying ETFs or unit trusts.

You may also invest in ETFs via DIY platforms such as Saxo, which gives you access to 3,000 ETFs on multiple exchanges. On Saxo, a trading commission applies and you make the asset allocation and rebalancing decisions yourself.