Annuities as a retirement tool to grow one’s wealth

Source: CPF Board, Manulife Singapore, Tokio Marine Singapore

What is an Annuity

The word annuity is synonymous with a lump sum of cash paid upfront in return for regular disbursements either immediately or some point in the future. For example, if one wants to retire in twenty five years, and he/she is 40 this year, the person will start putting in a single lump sum now and wait until closer or at his/her retirement age, say 65 years old when he/she is able to receive guaranteed yearly returns.

What are pros and cons of having an annuity plan
Pros
1) A useful ‘forced’ savings tool as means to enforce the need to start early.
2) A guaranteed stream of cash flows during retirement years.
3) Paying a lump sum now helps to minimise any uncertainties in the future such as job loss, or major illnesses one might face later in life.

Cons
1) Paying a single lump sum may pose a cash constraint, particularly for some who is running on tight cash budgets.
2) Potential returns in other higher yielding assets could be forgone, while a single lump sum is being locked up in an annuity plan.
3) Potential risks such as early death that might result in one not able to realise the monthly returns during retirement years. However, this issue could potentially be minimised if one were to make a bequest early.

Differences between annuity and endowment plans

The major difference between an annuity plan and an endowment plan is the payment mode at the beginning on the term. An annuity plan payment consists on a lump sum amount of money at the beginning of term in exchange for regular series of payment at the end of term.

An endowment plan is a regular series of payments made, say annually in exchange for one lump sum of cash at the end of the term of the plan.

CPF LIFE

The Central Provident Fund (CPF) Lifelong Income For The Elderly (LIFE) scheme is an example of a Singapore government-backed annuity plan that aims to provide Singapore citizens and permanent residents with a monthly payout for as long as one lives.

Eligibility requirements to join CPF LIFE

Source: CPF Board website
Source: CPF Board website

CPF members who do not have the required amount in the Retirement account or for those who are born before 1958, they can continue to apply to join CPF LIFE, and make an application to join CPF LIFE at any time between the payout eligibility and age 80.

How does CPF LIFE works

The CPF LIFE Plan is a voluntary savings programme, but once enrolled, one must satisfy several conditions if he/she can leave the plan.

There are two types of plans available under CPF LIFE. One is the LIFE Standard Plan, and another is the LIFE Basic Plan. Depending on one’s lifestyles and preferences, the LIFE Standard Plan offers higher monthly payouts to the beneficiaries, while the Basic Plan offers lower monthly payouts.

The monthly payouts under CPF LIFE also depend on the savings one has in the Retirement Account. For example:

Source: CPF Board website
Source: CPF Board website

If one would like to receive higher payouts, he/she may make additional CPF top-ups, provided the top-ups have not reached their maximum cap levels. The additional CPF top-up may be used to buy an additional CPF LIFE annuity to get higher CPF LIFE payout.

What are the current private annuity plans offered in the market

The two annuity plans that are highly sought after by individuals include Tokio Marine Life Insurance Singapore Ltd’s TM Paycheck Life, and Manulife RetireReady (Single Pay Premium).Both plans include monthly cash benefit of $3,000 upon retirement at 65 years old. Both plans assume a single 40-year old male individual living in Singapore and is a non-smoker.

TM Paycheck Life

Source: Tokio Marine Life Insurance Singapore Ltd.
Source: Tokio Marine Life Insurance Singapore Ltd.

The premium summary shown above is a $30,000 sum assured annuity with guaranteed monthly cash benefit of $3,000 upon retirement at age 65 years old. Excluding riders, the annual/single premium is $43,986. The monthly cash benefit of $3,000 received upon retirement is for a period of 15 years from the date of retirement.

Manulife RetireReady (Single Pay Premium)

Source: Manulife Singapore
Source: Manulife Singapore

The benefit illustration (BI) generated from Manulife Singapore showed a $520,450 single premium policy with guaranteed annual payback of $230,000 after the first year of inception at the age of 41 years old, and subsequently rising by an average $10,000 per year following that. For example at age 42 years old, the guaranteed returns rise from $230,000 to around $237,000.

Summary

As indicated at the beginning of this article, an annuity plan requires one to commit a huge portion of cash upfront and there are not many individuals that are able to start putting in a large amount of cash into an annuity plan.

However, if one is fortunate enough to have hit the jackpot or possess a huge inheritance amount, one of the many suggestions could be setting aside the cash amount into an annuity plan which provides guaranteed annual returns, on top of monthly cash benefits during retirement years. This is especially critical when one is not earning a getting a monthly pay cheque and the monthly cash could be used to offset the high living expenses during retirement.

Disclaimer:  The views expressed in this article are based on my personal opinions, and factual information gathered from the plan providers. Readers are strongly advised to seek the advice of their financial advisers before undertaking any investment plans.

This article is written by Hock Meng (Peak Hour), a licensed financial advisory consultant with Phillip Securities. MAS representative number is THM300399401. For a free financial health check/discussion, please contact tayhm@phillip.com.sg or +(65)9721 3987.

 

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I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.