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Private Life Annuity Plans – How Do They Help with Retirement Planning in Singapore?

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Clara Lim

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If you’ve been reading up on retirement in Singapore, you would have come across the word “annuity”, as in “private annuities” or “annuity plans”.

Although it’s a scary word that sounds a little like a prostate examination, the concept of an annuity is actually very simple. You pay a big amount now, and in the future, you receive smaller payouts, stretched over a long time. Kind of like an installment plan in reverse.

In fact, almost all Singaporeans would automatically have an annuity plan to their name when they retire. It’s called CPF Life.

Being on CPF Life doesn’t preclude you from getting as many private annuity plans as you like, though. Some people buy these because they want more money than CPF Life can give. Others want one so they can siam the dreaded CPF retirement sums (more on that tantalising proposition later).

Whichever your case, it’s definitely worthwhile to have a look at the annuity plans in Singapore and decide whether they’re right for you.

 

Comparison of private life annuity plans in Singapore (2019)

As of March 2019, these are the 8 annuity plans in Singapore that offer payouts for life, with credit to BBCWatcher on HardwareZone. (I’m completely ignoring the ones whose payouts stop after a certain age. With life expectancies on the rise, who even wants that?)

Private life annuity Guaranteed return Earliest payout Premium payment
Manulife RetireReady 2.57% p.a. 55 years old Single / 5 to 20 years (SRS eligible)
Aviva MyLifeIncome 2.2% p.a. Year 4 Single / 3 to 25 years
China Life Lifetime Income Plan 2.2% p.a. Year 5 3 to 25 years
Tokio Marine Retirement GIO 2% p.a. 55 years old 5 to 15 years
China Taiping Infinite Harvest 1.77% p.a. Year 5 Single
Great Eastern Prestige Life Rewards 2 1.62% p.a. (standard guaranteed income of $8,112) Year 4 Single (standard premium of $500,000)
Etiqa ePremier Eternity Presto 1.57% p.a. (from Year 10) / 1.61% p.a. (from Year 30) Year 2 (but better returns from Year 10) Single
Tokio Marine Retirement PaycheckLife Not stated 55 years old 5 to 15 years

 

How do you choose the right private life annuity plan?

First, you must know what NOT to look out for in a private annuity plan in Singapore. Some common features that you shouldn’t get sidetracked with are…

Insurance coverage: All annuities are provided by insurance companies, so naturally they come with insurance coverage for events like terminal illness. Unless insurance is a priority, don’t get too distracted by this – focus on the retirement income component instead.

Non-guaranteed returns: All insurers advertise a “projected” return of something like 4.75% p.a., split into “guaranteed” and “non-guaranteed” components. The latter has no basis in reality – even casinos also have non-guaranteed returns. So, pay attention only to the guaranteed return, which is usually much lower, e.g. 2%.

Capital guaranteed: All 8 annuity plans are “capital guaranteed”, which means you or your descendants will get back the money you paid one way or another, even if you die early. No reason to pick one over another based on this.

No medical underwriting: You don’t need to go through a medical checkup to get an annuity plan. Why? Because this is not a health insurance plan. So don’t base your decision on this feature either.

 

OK then, so what should you actually look at?

Once you sift through all the irrelevant bits (not saying they’re irrelevant for everyone lah, just that these things don’t matter if you’re focusing purely on retirement income), it becomes quite easy to assess annuity plans.

✔️ Guaranteed returns: You want to estimate the retirement income you can actually count on, so pay close attention to this number. It’ll tell you how much you will confirm guarantee chop get, based on the amount you paid for your premium.

For example, if you pay $500,000 for the GE Prestige annuity plan, you’ll get back 1.62% a year, or $8,112, in retirement income.

Notice that the guaranteed returns are usually quite low; usually around 2%. In fact, you can match this with Singapore Savings Bonds or even with a savings account.

But a life annuity plan gives you assurance that you’ll get this amount for life, whereas you cannot expect SSBs and savings accounts returns to remain the same until you die.

✔️ Payout date: One reason why Singaporeans like private annuities is because you only get CPF Life payouts from age 65 (possibly later, if CPF changes its policy again). But let’s face it, hardly anyone wants to work until that age. Even if you do, you’d want to work out of passion rather than necessity.

A private annuity plan will help you retire earlier, provided it allows you to start receiving payouts at your desired retirement age. For some plans, it’s age 55, but with others, it can be as soon as 4 or 5 years after you pay the premium.

✔️ Premium payment: Private annuity premiums (i.e. the amount you pay upfront) tend to be pretty straightforward. They’re usually a function of how much retirement income you’d like to receive.

Remember that a portion of it goes to insurance coverage, so, when getting your quotation, do the math to make sure you’re actually getting a decent return (in retirement income) for the amount you pay.

Most insurers also allow you to stagger the premium payment over a number of years. But if you can, it’s better to opt for a single premium plan rather than commit what you don’t already have on hand.

Finally, out of the 8 life annuities in Singapore, only Manulife is eligible for the Supplementary Retirement Scheme. If you have been topping up your SRS account to enjoy tax relief, this particular plan could be a good way to put your SRS balance to much better use. Otherwise, your cash is just gonna sit there, losing value to inflation, year after year.

 

Other than annuities, what other retirement planning options are there?

CPF Life and private annuities are both important aspects of retirement planning, but they are FAR from the only options to consider while hatching your escape plan from corporate slavery.

Here’s a highly scientific summary of the common ways Singaporeans plan for retirement. They each have their nuances, but for simplicity’s sake I just rated them “good”, “bad”, and “unknown”.

Retirement plan Returns Risk level Liquidity
CPF Life ✔️ ✔️
Private annuity plan ✔️
Savings ✔️ ✔️
Investment (stocks) ✔️
Investment (property)

 

CPF Life vs private annuity plan – which is better?

Hey, if you’re asking this question, kudos to you. Most Singaporeans don’t even think beyond CPF Life when it comes to retirement planning.

In some ways, CPF Life is an amazing deal. The promised returns are very high: Based on 2019 numbers, it’s something like 7% to 10% a year. Bear in mind it’s virtually risk-free. You’re really not going to get a better deal out there.

The ability to choose an escalating payout plan is my favourite feature of CPF Life (LOL, words I never thought I’d utter). I plan to live long and prosper, and that wouldn’t be possible if my retirement income shrinks year after year due to inflation.

But it’s not without drawbacks. I mentioned that the retirement payouts currently only start at age 65 – who knows if it’ll go up again? And the projected retirement payouts are non-guaranteed, so there’s a chance you might not get as much as you hope for.

Returns-wise, a private annuity plan pales in comparison to CPF Life. But if you use both in conjunction, an annuity can help plug the holes in the latter.

It gives you an income from your desired retirement age, which is most probably earlier than age 65. Also, you can control the guaranteed payouts, so you KNOW there will be at least $1,000/month (for example) waiting for you, regardless of what happens to your CPF.

I should also mention that if you have a life annuity, you can be exempted from CPF Life (and indeed the CPF Basic Retirement Sum). But it would take – pardon my French – a shitload of money to match the CPF Life payouts. Personally, I think it’s just more MoneySmart to have a combination of both.

TL;DR: Based purely on numbers, CPF Life is far superior. But it has shortcomings. So, it’s wise to supplement it with a private life annuity plan.

 

What about other forms of saving / investing for retirement?

Let’s check out some other common ways Singaporeans plan for retirement.

Savings: Many Singaporeans, especially the older generation, are savers. They like to put their cash in anything that’s super low-risk. Think savings accounts, fixed deposits, Singapore Savings Bonds, and that Milo tin under the bed.

Nothing wrong with doing what Smiley the Squirrel taught you from a young age, but the interest for such low-risk vehicles tend to top out at a little over 2% p.a. Which means your money is actually growing not just slowly… but negatively.

Consider keeping just the amount you need liquid (e.g. your expenses + emergency fund) in your savings account, and moving the rest to other vehicles that’s better for retirement.

Investments: A buy-and-hold investment strategy is an important part of your retirement plan, because it can deliver greater returns than a savings account or annuity plan.

Blue chip stocks, STI ETFs, and REITs can yield dividend returns along the lines of 4% to 8%. That doesn’t sound like much, but it’s double or even quadruple of the returns from a savings account.

Problem is, there are no guarantees when it comes to investments. If the stock market crashes – and it actually might, if you plan to hold your investments for decades – then that’s your hard-earned savings gone.

So, although investments should be a part of your retirement plan, the amount must be something you can afford to lose.

Property: Buy a swanky condo and rent it out to expats – this seems to be one of those old-school “investment strategies” popular among a great deal of Singaporeans.

But, in my opinion, this is the probably worst investment strategy for retirement. Not because it doesn’t deliver the returns you’re looking for, but because it actually creates debt (unless you’re paying for that ~Sky Habitat~ unit in cold hard cash). You want to be debt-free as you approach retirement, NOT acquire new debt.

TL;DR: It’s a bit leceh I must admit, but a good retirement plan should have a diverse mix of savings and investment components to balance risk, returns, and liquidity. For example, you can start with CPF Life as your base, add on a private annuity for added income, invest some money in blue chip stocks, and keep an emergency fund in a savings account. 

What are your plans for retirement? Share it with us in the comments!

 

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CPF Retirement Sum – How Does It Work and How Much Do You Need?

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Clara Lim

I used to be MoneyDumb. I hung out at H&M every day and thought that a $50 lunch set was a good deal. These days, I spend my time researching the crap out of life and trying to maximise utility on micro-decisions. I'm not sure if that's an improvement.