Putting money in CPF Life is better than buying annuity plans from private insurers wor.....
Flexible features of annuities draw investors as a supplement to CPF Life
This regular column addresses readers’ investing issues.
Annuities have become popular in recent years as people focus on the relatively lower risk of the products as well as the regular payouts they can offer. ST PHOTO: LIM YAOHUI
Lee Su Shyan
Associate Editor & Senior Columnist
OCT 16, 2023
Q: I am considering buying an annuity as one way to supplement the payouts from CPF Life (Lifelong Income for the Elderly). What are the pros and cons?
Many people approaching retirement are hoping to maintain a standard of living close to what they have when they are working. While CPF Life – the national longevity insurance annuity scheme – provides monthly payouts for life, it may not be sufficient should people be aiming for a more luxurious lifestyle.
While investments can bring in higher returns than an annuity, some feel they are not well versed enough to put their money into investments or are put off by the risks.
Accordingly, annuities have become popular in recent years as people focus on the relatively lower risk of the products as well as the regular payouts they can offer.
Phillip Securities’ financial services associate director Leslie Ng estimates that a 45-year-old male can achieve a $1,000 monthly lifetime payout (comprising guaranteed and non-guaranteed components) from age 65 if he saves $1,000 a month for 15 years, or $1,400 per month for 10 years. He can also set aside $128,000 in a single premium at the age of 45.
This will give him additional income on top of his CPF Life payouts for added assurance in his retirement years.
CPF Life
But first things first. Financial advisers generally say that CPF Life is the foundation for retirement planning.
At the age of 55, your Central Provident Fund savings will be transferred, up to the Full Retirement Sum (FRS), to create your Retirement Account (RA), which will provide the monthly payouts in your retirement.
For the 2023 cohort of people who turn 55 during the year, the FRS is $198,800. With this amount in the RA, this translates to an estimated monthly payout of between $1,510 and $1,620, starting from the age of 65, based on the CPF Life Standard Plan.
An individual can keep more in the RA, but the amount is limited to the prevailing Enhanced Retirement Sum (ERS) of the year.
The prevailing ERS in 2023 is $298,200. This translates to monthly payouts of between $2,210 and $2,370 for life, based on the CPF Life Standard Plan.
The earliest that you can commence your CPF Life payouts is at age 65. You can also opt to defer them till age 70.
Annuities in a nutshell
Annuities are often described as retirement income insurance nowadays. They fall into two types, said DBS Bank’s head of financial planning literacy Lorna Tan. Traditional or life annuities provide cash flow for the rest of one’s lifetime. Term annuities provide cash flow for a specific period.
A life annuity provides monthly or yearly payouts for as long as you live and insures you against the risk of outliving your savings. It involves paying an insurer a one-time single premium or a series of payments over an agreed period. The premium is invested to provide you with regular income in the future.
As most retirees worry about outliving their financial resources, the annuity’s regular payouts – especially if they are guaranteed and for life – offer them peace of mind, Ms Tan said.
There is also the added plus that should the insured die prematurely, the balance cash value, if any, will be distributed to his beneficiaries, she added.
As CPF Life payouts start at 65, “if you desire an earlier income flow, you may consider an immediate annuity that is designed to pay an income soon after it is bought”, she said.
The additional income stream from the annuity comes in handy to supplement the CPF Life payouts. “Most retirees find themselves spending more in the first 10 to 20 years of their retirement as they would be more physically mobile and desire to travel or pursue passions like setting up a small business,” she added.
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Phillip Securities’ Mr Ng said people can choose whether to receive the annuity payouts over 10 or 20 years, or over their entire lifetime. “As people become more aware of their increasing life expectancy, we are seeing them plan for lifetime payouts.”
He said he has seen more inquiries from clients aged 40 and above. “This stems from their realisation that many ongoing costs are inescapable even in our retirement – one of which is our Integrated Shield premiums, which increase with age and medical inflation. We therefore need to create an income stream for such necessities.”
That’s because as people age, it is possible that the additional private medical insurance premium payable on the Integrated Shield Plan will exceed the MediSave withdrawable limits, requiring a cash top-up of the difference.
Mr Ng added: “Nowadays, I rarely see clients with only one retirement plan. Instead, they combine multiple plans so that they can have a higher monthly payout during their active retirement years from age 65 to 75, and a lower payout from age 75 onwards.”
Mr Christopher Tan, chief executive of wealth advisory firm Providend, said: “The advantage of such products is that you can buy at any time you want and decide when you want to have the payout. There are no restrictions like those for CPF Life, where the earliest you can have the payout is age 65.”
He added that people can surrender their annuity/retirement income products halfway and encash the surrender value if they are prepared to suffer some losses. There is no such option with CPF Life.
Another feature that customers have been drawn to is the flexibility to change the life insured and assign the policy to the next generation.
Mr Raymond Ong, CEO of Etiqa Insurance Singapore, said this means “the policy can be passed down to the next generation while the regular income is being paid”.
These retirement insurance products are now getting popular for estate planning. With the option for beneficiaries to receive payments even after the policyholder’s death, this can provide lifetime income to the surviving spouse and family.
Mr Ong added that the retirement policies often come with a short payment term, such as between three and five years, to make the premium more affordable, instead of a large single payment.
They also have features such as flexible payout options, where one can deposit the money with the insurer at a non-guaranteed interest rate, with the flexibility of withdrawing it at any time the money is needed.
Some of these policies can offer inflation protection, which ensures that the income keeps pace with the rising cost of living.
Note that CPF Life also offers a similar option to protect your retirement income from rising prices with its Escalating Plan, under which payouts will increase by 2 per cent each year. The payouts start lower, but eventually become higher than the Standard Plan and Basic Plan payouts.
Some features of annuities
There are several players in the market that offer retirement income insurance. Apart from DBS, Etiqa Insurance Singapore, Great Eastern, Income, Manulife and Prudential are among those that have such products in the market.
These products generally will offer a regular monthly stream of income as well as a lump-sum payout at retirement. You can choose the payout period as well as the sum you want per month.
You can even make changes to the income payout period, but do check at what point this needs to be done.
Another feature will allow you to put your premium payment on hold while your policy stays in force – for example, during a period of retrenchment.
These plans may also offer the waiver of premiums where there is total and permanent disability.
What to watch out for
These retirement income plans may offer more flexibility than CPF Life, but are likely to fall short when it comes to the payouts. DBS’ Ms Tan cautioned that private insurers will find it difficult to match CPF Life’s guaranteed and risk-free interest rate, which can go up to 6 per cent a year.
Another important point to note is that for the payouts, there is usually a guaranteed portion and a non-guaranteed component, which can fluctuate.
Providend’s Mr Tan said the reason CPF Life can offer higher returns is that the Singapore Government guarantees the return – based on a formula – as well as the capital from any losses. In addition, there is no distribution cost and so expenses are much lower, which in turn translates to higher returns, he added.
He said CPF Life is Singapore’s best annuity plan, but there is a limit to how much one can “buy” of CPF Life.
He used an illustration to compare CPF Life, based on the ERS amount of $298,200, with a near-equivalent amount placed in an annuity and retirement plan with an insurance company in Singapore (see tables).
This comparison shows that the guaranteed portion compared with CPF Life is lower. Even if the insurer can achieve the projected returns for the non-guaranteed portion, the two amounts added together is still lower than the CPF Life payout, noted Mr Tan.
Being exempted from CPF Life
The savings in your RA are meant to provide you with monthly payouts during retirement.
CPF says that if you have a pension or private annuity plan that provides the same or higher monthly payouts for life, you can apply to be exempted from setting aside the retirement sum, and withdraw all your CPF retirement savings.
Exemption from CPF Life is allowed from age 55, as long as the member is receiving guaranteed monthly annuity payouts at the point of application to be exempted.
Take, for instance, someone who turns 55 in 2023, when the FRS is $198,800. In order to be exempted from CPF Life and withdraw this sum, a male CPF member would need to have an annuity that provides a guaranteed monthly annuity payout of at least $1,628, or at least $1,517 in the case of a female CPF member.
The member has to be both the policyholder and the sole insured person of the annuity policy.
Take note that if some time down the road, you surrender or terminate your annuity, that surrender value must be refunded to your RA, up to the Full Retirement Sum applicable to you, with accrued interest.
Mr Gregory Chia, group director of retirement income at CPF Board, said: “While there is this option to get exempted from CPF Life if you have a private annuity, we have not seen members taking up this option in recent years.
“It indicates that members themselves find CPF Life to be superior to other annuities in the market. If they do buy annuities, it is in addition to CPF Life, rather than to replace it.”
Bottom line
Annuities will not stack up based on the numbers, but may be an option for those who are looking to supplement their CPF Life.
DBS’ Ms Tan said there are also investment products such as funds that can offer similar regular income payouts.
Especially for those who are in paid employment, probably the most straightforward way of retirement planning is to focus on achieving the requisite ERS.