Hello, hope everyone had a wonderful Christmas celebration with your loved ones. This is part 2, to continue from the last post on popular reasons why investors buy Unit Trusts in Singapore. The list is not exhaustive, but if you have never invested in UTs and you are curious to find out how UTs can add that extra dimension in your investment portfolio, we can get in touch.

Remember Einstein said the ultimate level of insanity is doing the same thing over and over again but expecting to receive a different result. If you belong to the other group that have invested in UTs for a few years but is not satisfied with your investment portfolio or the banker/relationship manager’s recommendations of the Unit Trusts and you will like to see a change in 2016, I would also love to hear from you.

Happy reading and wishing you and your loved ones a Happy, Healthy and Huat 2016 ahead!

D. Possible to use CPF OA/SA and SRS

Investing in UT is popular in Singapore because of the option to use our CPF OA (Ordinary Account), CPF SA (Special Account) and SRS (Supplementary Retirement Scheme) to make investments. Any balance above $20,000 in the CPF OA and $40,000 in the CPF SA can be invested. I urge investors to be careful in the use of CPF SA to invest as the current interest the CPF Board pays is 4% per annum for CPF SA balances and 2.5% for CPF OA because if the investor uses the CPF SA, he/she is giving up a risk-free guaranteed rate of 4% to invest in an instrument that may not give the same amount of returns after charges or worse still may have negative returns.

I encourage all Singaporeans, Permanent Residents and also foreigners with a taxable income of $60,000 or more per annum to open a SRS account. Based on the Singapore income tax rates for 2014, anyone with a taxable income of $60,000 in the previous year needs to pay approximately $1,950 in taxes. If he/she contributes to the SRS the annual maximum allowable contribution for Singaporeans/PRs of $12,750 presently, then his/her tax for that year will only be approximately $1,057.5, a savings of $892.50. For a foreigner who can contribute up to $29,750, and assuming he/she does that, then for the same $60,000 taxable income, he/she only needs to pay $208.75 in taxes, significantly lower than $1,950!

All these calculations are made without including the personal tax rebate of up to $1,500 or 30% rebate for taxpayers below age of 60 and 50% for taxpayers above 60 (whichever rebate is lower) because we do not know when and if the Singapore Government and Ministry of Finance will stop extending this rebate. Higher income earners with taxable income >$160,000 a year will benefit even more with SRS contributions. At $160,000, they will be paying approximately $13,950 in taxes. Assuming they make the current maximum SRS contribution of $12,750, their tax payable will drop to $12,037.50: a fantastic savings of $1,912.5. This equates to a 15% impressive tax savings on $12,750, very attractive considering there are no investments giving guaranteed returns of even 6% p.a. now.

The Ministry of Finance announced in Budget 2015 that they will raise the current ceiling for voluntary SRS contributions for Singaporeans and PRs to $15,300 and $35,700 respectively. This is good news for investors already contributing the maximum of $12,750 every year; they will get to enjoy more tax savings if they contribute more with the revised ceiling from 1 Jan 2016.

Other than the obvious tax savings for SRS contributions, monies in the SRS can also be used to invest in UTs, shares, ETFs, REITs, insurance, etc. If the monies were left untouched, the returns will only be the prevailing rate of ordinary savings account of the SRS operator, which has been 0.1% to 0.2% per annum for a long time and will never beat inflation. Total SRS contributions have been increasing steadily over the last 13 years from S$160 million in Dec 2001 to S$4,890 million in Dec 2014. (2001 to 2014 SRS statistics from the Ministry of Finance.) This is probably due to most SRS holders continuing to contribute the full amount every year after they have made their initial contribution and this trend seems set to continue.

Source: http://www.mof.gov.sg/Portals/0/MOF%20For/Individuals/SRS%20Cumulative%20Statistics%202014.pdf

E. Longevity and popularity for dividends as passive income

Many Singaporeans love to invest in REITs since the first REIT was listed in Singapore in July 2002. There is a UT, Philip Singapore Real Estate Income fund which has a few listed REITS in its holdings. Started in Sept 2011, this UT has a fund size of approximately S$44.77 million as of 21 Dec 2015 and holds a portfolio of over ten Singapore industrial, office and retail REITs. The quarterly dividends that this UT has been paying out is between 15 to 16.1 cents per unit, which is about 5.21% per annum assuming no sales charge and the purchase price of $1.1959/unit. For $100,000 invested, the dividend payout will be approx $5,210 a year, a pretty decent stream of passive retirement income for most Singaporeans who are worried they will outlive their savings due to their longevity.

Although the dividend rate of 5.21% for Philip Singapore Real Estate Income UT is lower than the average dividend payout of 7.36% among the 35 REITs in the last quarterly payout in Dec 2015, the advantage of the UT over a single counter REIT is the diversification across different class of Singapore Real Estate. As of Oct 2015, its portfolio consists of 31.46% retail, 28.65% industrial, 9.53% offices and 7.74% hotels, the rest are mixed developments and cash, therefore greatly reducing the risk of a particular sector of real estate not doing well and also potential single company key executive or management risk.

F. Opportunity cost of inaction

Singapore’s average interest rate from 1988 to 2014 was 1.68%, hardly able to be on par with our inflation rate of approximately 2.8% from 1962 to 2014. I would think the post-global financial crisis in 2008 marked the start of an era of low interest rates for developed nations. In fact, there is a double whammy situation: we have both lower and lower interest rates, if we compare the decades from the 80s to the 90s to 2000s, and rising inflation rates on the other hand.

Ask any lower- and middle-income household in Singapore and many will say that inflation felt more like 3% to 4% per annum. Although Singapore’s interest rates had risen in 2015 and likely continue into 2016, taking a cue from US Fed Chief Ms Janet Yellen’s move to raise US interest rates in Dec 2015, it is unlikely we will be able to see SGD Fixed Deposit rates returning to more than 4% per annum any time soon. Warren Buffett once said, “The one thing I will tell you is the worst investment you can have is cash… Cash is going to be worth less over time”. People who hold cash equivalents today may feel safe, but they have opted for a terrible long-term asset that pays virtually nothing and is certain to depreciate in value.

Thus if Singapore investors remain passive and keep their monies in savings accounts and fixed deposits, in the long term they are unlikely to beat real inflation rate, which is typically higher than many ASEAN neighbours. We know Singapore is a small nation vulnerable to cost-push inflation as we import most of our food, raw materials, oil and energy, etc. Persistently high rates of inflation year on year will lead to companies adjusting the selling price of their goods and services very often, which in turn leads to employees demanding pay raises etc, causing a vicious cycle.

From 2006, the rapid increase in Singapore’s population also led to raised demand and inflationary pressures on basic goods like public housing and utilities, and an increased strain on the transport infrastructure leading to higher COEs for all form of vehicles and public transport fee hikes. Thus depositors who have their monies in savings accounts in the banks experienced a decline in their real purchasing power of goods and services. For investors with a concern to guard their wealth and investments against rising inflation can consider the Fidelity Global Inflation-linked bond UT.

This UT’s objective is to generate an attractive real level of income and capital appreciation by using a range of strategies from within, amongst others, the global inflation linked, interest rates and credit markets. The UT was started in July 2008 and has delivered approximately 1.7% per annum, not factoring sales charge. The returns are nothing to shout about because the last 3 to 4 years, inflation did not grab headlines and also global oil prices are soft.

The writer Derek Gue, is a financial strategist and can be contacted at bwutbook@gmail.com to give personalised advice on your UT portfolio. The above article is extracted from his bestselling book Huat Ah! Building wealth in Singapore with Unit Trusts, now available at all good bookstores in Singapore.