How to reach your savings goal effectively?

Time deposits and fixed-term endowment. Big similarities, bigger differences.

We all pursue different wealth goals, but one thing we have in common is the need to develop a regular saving habit. A Hong Kong Deposit Protection Board survey has found that 65% of Hong Kong people save regularly, putting away an average of HK$7,500 per person per month, with the median amount at HK$5,000. The survey also found that Hong Kong people tend to favour current or time deposits and fixed-term endowment as their savings tools, with a 75%/33% split. Whether you want to save up for retirement, getting married, buying a property, further education or starting a business, there are many financial tools on the market that can help you accumulate your wealth. Among the simplest and most common of these tools are bank time deposits and fixed-term endowment, which allow you to choose the currency you save in and the length of the fixed term based on your needs . Both are lower-risk options, but do you know the differences between them? Which one is right for you?

Time deposit

Nature

With a time deposit, you leave an amount of money in the bank for a fixed period of time to earn higher interest than that offered by basic accounts upon maturity. The fixed term typically lasts from 7 days to 12 months. Compared to other investments, a time deposit account is relatively easy to set up. All you have to do is specify the deposit amount and the fixed term, either in person at a bank or through phone banking or internet banking.

Risk

The penalty of withdrawing the time deposit earlier than the maturity date is the loss of interest. Upon maturity, investors looking for other channels for investing their money will also have to keep track of how interest rates are trending.

Protection

The Deposit Protection Scheme was introduced in Hong Kong to protect depositors by paying them compensation in the event of the failure of a bank which is a member of the Scheme. Both personal and corporate depositors are entitled to compensation of up to HK$500,000.

Fixed-term endowment

Nature

This is an insurance plan with a fixed term and fixed premium. Fixed-term endowment are very different from time deposits, in that a fixed-term endowment is an insurance contract but not a bank deposit account. Through a savings insurance plan, the policy holder entrusts an insurance company with an amount of money in the form of life insurance premiums paid. In return, he receives guaranteed maturity benefits and enjoys life protection during the policy term.

Risk

Compared with time deposits, the investment period of a fixed-term endowment is generally longer. In case the policyholder decides to surrender the policy before it breaks even, they will suffer a loss in terms of the premiums paid. In addition, if the premiums of an endowment plan are not paid by automatic transfer, in case of late payments, the policy might be terminated and there is a possibility that the amount due at maturity will be less than the premiums paid.

Protection

A fixed-term endowment differs from a time deposit in that, if the insured person unfortunately passes away while the policy is in effect, the policy’s designated beneficiary will receive a death benefit. In that way, it will protect your loved ones financially. Some fixed-term endowment on the market also provide protection against death resulting from an accident, terminal illness and premium deferment penalties during unemployment at no extra cost, providing you with even more comprehensive protection.

Fixed-term endowment are normally available with a quota and come with a longer period than time deposits, allowing you to secure a more stable return for the following few years. In terms of installment options, with a fixed-term endowment you will get a choice of 3 payment options - monthly payments, annual payments or a one-off lump sum payment. The underlying investments used to grow the returns for time deposits and fixed-term endowment are also different, and generate varied returns. The below examples show a time deposit account and a fixed-term endowment, both with the same principal amount, with the rate of return determined based on current market data. This comparison shows that a fixed-term endowment with a 2-year premium payment period delivers a return of 114% of total premiums paid at maturity after 5 years, and a time deposit which generates a return of 104% over a period of 5 years.

  Principal / Premium Term Interest p.a. Interest / Return Amount due at maturity / Maturity benefit Amount due at maturity or maturity benefit / principal or premium
Time deposit US$100,000 5 years 0.7% US$3,500 US$103,500 104%
Fixed-term endowment US$100,000 5 years 3% US$14,239 US$114,239 114%

Notes:

  1. Interest rates for Time Deposit vary according to the deposit amount and length of the fixed term. The fixed term usually lasts from 7 days to 12 months. For comparison purposes, the above figures are based on market data of 5-year fixed-term deposits that were current as of 20 January, 2020. The figures may vary as a result of market fluctuations. Therefore, there may be a discrepancy between these and the figures in a real-life scenario.
  2. The above figures are rounded off and may therefore be at variance with the actual values.
  3. The above table is for illustration purposes only.
  4. The rate of return is determined based on the assumption that the premium is paid in 2 annual installments and the policy term is 5 years in total.

When choosing a savings insurance plan or a time deposit, you should have a thorough understanding of the relevant risks involved and ensure you have sufficient liquidity to respond to unforeseen developments. Whether you decide on a fixed-term endowment or a time deposit, you may incur a loss if you withdraw your money or surrender your policy before maturity.

* According to the survey findings at http://topick.hket.com/article/2454345/, 65% of Hong Kong citizens have a saving habit, and the median amount saved is $5,000 monthly.