Ask many Singaporeans about how they plan to fund their retirement, and you’ll probably get a couple of stock answers: “CPF” and/or “my kids”.
But that’s not you, right?
As a MoneySmart reader, you would know that, while the CPF LIFE scheme has its merits, the highest monthly income it can offer is only about $2,000.
As for children, well… Those ought to come out of the womb with a big MAS-style sticker stating “all investments are subject to risk, including possible loss of the principal sum invested”.
No, what you want is a more reliable form of retirement income. There are several ways to generate a retirement income, but in this article, we’ll talk about the most foolproof way — a retirement annuity plan.
What is this retirement annuity plan you speak of?
Check out any insurance company’s retirement planning offerings, and you’d come across the word “annuity” — as in “private annuities”, “annuity plans” or “retirement annuities”.
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 instalment plan in reverse.
In fact, CPF LIFE is an annuity plan, so you probably already have one to your name. But you can also buy as many private insurer annuity plans as you like, too.
Most people buy them because they want more money on top of CPF LIFE payouts. Others want one so they can be exempted from the CPF Retirement Sums (more on that tantalising proposition later).
Best retirement annuity plans in Singapore 2021
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. Most insurers offer 1 or 2 such plans. For a start, check out the following:
- Manulife RetireReady Plus
- Singlife with Aviva MyLifeIncome
- China Life Lifetime Income Plan
- Tokio Marine Retirement GIO
- China Taiping Infinite Harvest
- Great Eastern GREAT Lifetime Payout
- Prudential PRULifetime Income
- NTUC Income Gro Annuity
As a minimum requirement, you’d want an annuity plan that pays out for life (just like CPF LIFE).
If your goal is retirement planning, it’s safe to ignore those with payouts only up to a certain age. With life expectancies on the rise, who even wants that?
How do you choose the right 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 income: All insurers advertise a “projected” income of something like 4.75% p.a., split into “guaranteed” and “non-guaranteed” components. You can’t count on non-guaranteed returns, so pay attention to the guaranteed component instead.
❌ Capital guaranteed: All retirement 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.
Once you sift through all the irrelevant bits (not saying they’re irrelevant for everyone — just that these things don’t matter if you’re focusing purely on retirement income), it becomes quite easy to assess annuity plans. We can narrow it down to 3 main factors.
Factor #1: How much is the guaranteed income?
Insurers typically state a “projected” retirement income, which is split into “guaranteed” and “non-guaranteed” income.
The non-guaranteed returns have little to no basis in reality — even casinos also have non-guaranteed returns! — so pay attention to the guaranteed income, which is usually much lower.
This is the amount you can actually count on. 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 $100,000 for an annuity plan with 2.5% p.a. guaranteed returns, you’ll get $2,500 a year in retirement income. Anything extra is just a bonus.
Notice that the guaranteed returns are usually quite low; usually around 2%. That doesn’t sound a whole lot better than a savings account, right?
But a life annuity plan gives you assurance that you’ll get this amount for life, whereas you cannot expect savings accounts returns to remain the same until you die.
- Withdrawal Costs
- Min. monthly contribution
- Min. Funding
Factor #2: What’s the premium payment structure?
Annuity plan premiums (i.e. the cost) tend to be pretty straightforward. They’re usually a function of how much retirement income you’d like to receive.
So if your annuity plan offers 2.5% p.a. guaranteed income, and you’d like to receive $1,000 a month, here’s how you should work it out:
- $1,000 x 12 = $12,000 annual income (i.e. 2.5% of the premium)
- Divide $12,000 by 2.5 = $4,800 (i.e. 1% of the premium)
- $4,800 x 100 = $480,000 (i.e. 100% of the premium)
To get a guaranteed retirement income of $1,000 a month, you need to pay a premium of $480,000.
If you have that much on hand, you can go ahead and pay for the annuity plan in one shot if it offers a single premium payment option. Otherwise, most insurers allow you to stagger the premium payment over a number of years, e.g. 5 or 10 years.
Finally, check if the annuity plan can be paid using Supplementary Retirement Scheme funds. 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 good use.
Factor #3: What are the payout date options?
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 a a couple of years after you pay the premium.
CPF LIFE vs private annuity plan — which is better?
Based purely on numbers, CPF LIFE is far superior to private annuities. The promised returns are very high: something like 7% to 10% p.a. returns a year! Bear in mind that CPF is virtually risk-free too. You’re really not going to get a better deal out there.
But CPF LIFE has some shortcomings, too:
- The earliest payout date is age 65
- Maximum retirement payout is about $2,000/month
- Projected retirement payouts are non-guaranteed
- Possible changes to policy down the line (e.g. changes to payout date)
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.
For example, imagine if you had a private annuity plan offering a lifetime payout from age 55, on top of your CPF LIFE.
This means you can semi-retire from age 55 with the help of your $1,000 income from your annuity plan.
And when you turn 65, you start getting $2,000 in CPF LIFE payouts too. Add that to your annuity income, and you’ll get a monthly paycheck of $3,000 as long as you live.
I should also mention that you can be exempted from CPF LIFE (and indeed the CPF Basic Retirement Sum) if you have a private annuity that pays out for life, and the payouts can match CPF payouts.
But it would take — pardon my French — a shitload of money because private annuities have lower returns.
What are other ways to get a retirement income?
CPF LIFE and private annuities are both important aspects of retirement planning, but they are not 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|
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’s wrong with savings/investments/property?
Savings: 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 about 2% p.a. Which means your money is actually growing not just slowly, but possibly negatively compared to inflation!
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.
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.
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.
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Blue chip stocks, 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. When stock markets crash (and you should expect multiple crashes throughout the decades) then that’s your hard-earned savings gone on paper. You need to be strong enough to hold on to your investments until they recover.
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So, although investments should be a part of your retirement plan, you need to diversify the risks with other tools, such as annuities and cash savings.
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