Someone was asking me about the POSB eMSA where you can earn up to 2% p.a. on a special savings account with the requirement that you need to maintain an increasing balance every month by depositing additional money.
It sounded too good to be true so I decided to investigate further by asking my friend to forward me the email.
The headline of the email that promoted this offer certainly looked enticing.
Now you can kick start the New Year with a special savings account. eMySavings Account 2014 (eMSA 2014) lets you save monthly and earn interest up to 2.014% p.a.*!
Reading further down the email, the catch was revealed.
*The base interest is computed based on each day-end balance and will be credited at the end of each month. The base interest rate will be reduced to 0.01% p.a. if there is an unsuccessful credit of your monthly savings amount, withdrawal or account closure in the month. The top-up interest will be earned between January and December 2014, and is computed based on incremental average daily balance which is subjected to minimum of S$1,000 and maximum of S$30,000. It will be credited by the 5th calendar of each month. Average daily balance is derived from the summation of each day-end balance divided by number of calendar days in the month. Promotion ends 31 March 2014. Product terms and conditions apply.
What it means to say is that the funds earned an interest of 0.25% p.a. – only the incremental balance each month earned interest at a rate of 1.764% p.a. Since this was calculated monthly, the uplift in interest is not much. It is not easy for the layman to realize this. Even the examples provided by POSB did not show how much interest was earned or the effective rate that was earned.
Assuming someone puts in the same amount each month, I calculated that his actual annualized returns is less than 0.5% p.a. So much for 2.014% p.a.
While the plan might benefit certain groups of people, there will definitely be people who think that they are getting a better deal than they actually are.
For example, my friend who asked me about the POSB eMSA actually thought he would be earning 2% p.a. Using that as a baseline, he wanted to know whether there was anything else in the market he could place his funds in that could earn more than 2.5% p.a.