By Larry Haverkamp

IN A series of talks to the Singapore Police Force about personal finance recently, I mentioned that safe choices - like fixed deposits - pay less than 1 per cent per year.

It is pushing us toward taking more risks - like buying shares - to get higher returns.

I asked who had money in the stock market. Some did, and had invested in unit trusts.

Others had purchased investment linked products (ILPs). Most had bought their ILP from a friend or relative who sold life insurance.

Many owned 'regular premium ILPs'. These require you to use cash instead of CPF money but they offer the convenience of regular monthly payments.

The other choice is a single premium ILP. It lets you use CPF money but you must buy with a big lump-sum payment.

While regular premium ILPs appear to be popular, they have a drawback. Your insurance agent or financial planner is likely to lose the sale if he tells you about it. So I will.

The big picture

Most buy unit trusts through a bank or on-line. ILPs are usually sold through life insurance agents. Financial planners sell both.

We have around 350 unit trusts and ILPs approved under the CPF investment scheme (CPFIS). There are almost an equal number of each.

Outside of CPFIS, another 2,000 unit trusts are sold here. For those, you must use cash and not CPF money.

Keep in mind that you cannot invest the first $20,000 of your ordinary account (OA) and $30,000 of your special account (SA). It is to keep your base savings safe.

It's a good deal as they earn a handsome 5 per cent return on amounts up to $60,000 in your special or retirement account, at least through 31 Dec 2010.

With your core savings secure, you can focus on investing your surplus CPF money and cash. As mentioned, the standard vehicles are unit trusts and ILPs.

The good and the bad

There are two types of ILPs: Single premium (good) and regular premium (bad). It is easy to confuse them and - from what I have heard - agents and financial planners often push the regular premium ILPs because it earns them more commissions.

The commissions will cost you an average of one year's worth of premiums. None of that money goes towards the investments you are trying to buy. It all goes into the pockets of the agent and his company.

An alternative is a 'single premium ILP'. It does not have the high sales charges but you must come up with a big chunk of money up front. You can also use CPF money to buy it.

A variation is a 'recurring single premium' ILP. You can make regular monthly purchases at no extra charge but each one is considered a new purchase. Many find it cumbersome and inconvenient.

A third choice is a unit trust's regular savings plan. It is like a regular premium ILP except you can buy it with your CPF money and the regular savings feature - which most unit trusts offer - is always FREE.

I think this is the best choice. I recommend you take it and avoid ILPs altogether. The risk is too high of getting stuck with the expensive type, requiring you to pay a year's premiums for the privilege of having it sold to you.

Test your agent

Give your agent or financial planner a test and ask: 'I want to use cash to buy $100 per month of stocks. How can I do it?'

• IF he tells you that a unit trust with a regular savings plan is your best bet, give the planner an 'A' grade.
• IF he recommends a regular premium ILP but discloses that sales charges are high compared to single premium ILPs and unit trusts, give him a 'C' grade.
• IF he recommends a regular premium ILP and doesn't even mention the unit trust option, give him an 'F' grade and drop him immediately.
• We have 13,000 agents and 2,000 financial planners in Singapore. I suspect that more will fail this test than pass. Let me know the results you get.

This article was first published in The New Paper.