Is It Safe to Switch From a Bank Account to Non-Bank Account?

You might have noticed a slew of products that appear to be good alternatives to savings accounts. Offered by non-bank financial institutions, such as insurers, they often come with attractive returns, typically around 1.5% to 2.5% p.a. 

With our once-beloved bank savings accounts slashing their rates to 0.4% or 0.5%, these products do seem like very attractive alternatives to our savings accounts.

… But they are not necessarily as safe.

Higher returns? What’s the catch here?

While you might be drawn to the higher returns, there are many other factors you should consider. For a start, these cash management platforms and insurance savings plans are not the same as savings accounts and fixed deposits.

Bank accounts are generally deemed safe, practically risk-free. Not only are banks highly regulated by the Monetary Authority of Singapore, but your bank deposits are also protected by the SDIC, or Singapore Deposit Insurance Corporation. 

Under the SDIC’s Deposit Insurance (DI) Scheme, up to S$75,000 of your bank savings are protected, in the event that your bank fails. 

On the other hand, although MAS does regulate non-bank financial institutions, they are subjected to different regulations. As such, accounts offered by them may not enjoy the same protections that bank savings account holders have.

These accounts may still be good options if you are looking to stash your savings and get higher returns, but definitely check on a few things before taking up such a plan!

1. Is the product provider a SDIC Scheme Member?

Aside from the DI scheme (which covers bank deposits), SDIC also administers the Policy Owners’ Protection Scheme (PPF) to cover life and general insurance products. It protects up to S$100,000 per life insurer (max. S$500,000 across all insurers).

Simply put, if you sign up for an insurance savings plan from one of the participating insurers, your original deposit will still be protected in the event that the company fails.

The SDIC PPF only covers insurance policies issued in Singapore by MAS-approved insurers who are scheme members. Examples of products protected under the SDIC PPF scheme: Singlife Account, Dash EasyEarn, and Etiqa’s ELASTIQ.

Cash management accounts offered by other financial institutions are not protected under the DI/PPF scheme. Thus, there might be a slightly higher risk exposure for your savings.

2. Is your capital guaranteed?

Other than SDIC coverage, it is also important to check if your capital is guaranteed. You would not want to end up withdrawing less than what you deposited in!

Insurance products like endowment plans typically offer a capital guarantee (look for the words “capital guaranteed at maturity”). What it means is that your capital is guaranteed, but only if you hold the policy to the end of the policy term

On the other hand, investment-related cash management accounts would not have a capital guarantee. 

Of course, Robo-advisors and investment brokers will usually invest your money in lower-risk investments to preserve your capital and minimize its exposure to risks. But as with any investment, there is always risks involved.

3. Are the returns guaranteed or non-guaranteed?

Many financial institutions advertise the potential return for their products. While these numbers might be tempting, it is important to keep in mind that these are projected returns.

This means your returns can be subject to market fluctuations, and you might not necessarily receive returns similar to the advertised rate. Even among the relatively safer insurance savings plans, there are variations between policies. 

Even though the non-guaranteed returns from the non-guaranteed component will be subject to market conditions, you are assured of the guaranteed returns.

4. What is the financial firm’s credit rating?

Financial institutions would usually engage agencies to give them credit ratings. Some of the most famous credit rating agencies are Standard & Poor’s (S&P), Moody’s, and Fitch. 

The agencies would conduct a comprehensive analysis of the financial institution and give it a credit rating. The rating represents the agency’s opinion of the company’s ability to fulfil its commitment to its customers.

This is especially important if your Sum Assured is more than S$100,000 as SDIC’s protection is capped at S$100,000 per life assured per insurer for life policies.

Conclusion: Apart from SDIC protection, consider the other risk factors

While some of these new insurance plans and cash management platforms do seem similar to bank accounts, they are different. Do not mistake them for a direct replacement for a bank savings account!

Bank savings accounts will continue to be essential for our day-to-day transactions. We recommend hanging on to your original savings accounts keeping at least a few months’ of expenses in there.

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