Annuity – 21 Things Private Annuities Can Do That CPF-Life Can’t
Client: Hi Choe, when it comes to retirement income, CPF Life has a much better return than private annuities right?
Me: In some ways, yes.
Client: What do you mean by “in some ways”? Do you mean that some private annuities can have a better return than CPF Life?
Me: What I meant is that private annuities have features that CPF Life don’t so it’s not really an apple-to-apple comparison.
Client: Isn’t returns all that matters when it comes to an annuity?
Me: Let me put it this way. Suppose that there is an annuity that has a return of 20% p.a., will you be interested?
Client: Of course! But what’s the catch?
Me: Well, the catch is that you can only start withdrawing from age 99 onwards.
Client: Then what’s the point?
Me: The point is that returns are not all that matters!
CPF Lifelong Income For The Elderly (CPF Life) is a national longevity insurance annuity scheme that provides Singaporeans and Permanent Residents with monthly income payouts for life. For many of us (myself included), this is an integral part of our retirement planning and one major decision to make is to decide the right amount of retirement savings from our CPF to set aside as premiums for CPF Life.
While CPF Life is thought of collectively as a national retirement scheme, it is essentially a retirement plan when we consider it as individuals. And, when we consider something as a retirement or financial planning product, the focus will naturally be on “returns” and when it comes to an annuity plan, one way of defining “returns” is the income payout received as a percentage of the premium.
In simple language, the returns of an annuity is how much can you get back every month from what you put in.
Here are some examples from the CPF Life Payout Estimator based on the Standard Plan for someone born in 1967 (i.e. age 55 in 2022):
Click above image to enlarge
An income of about 9% p.a. is very attractive indeed and a quick mental calculation will conclude that you just need to live for about 11 years from age 65 onwards to be able to “take back all your money” and thereafter enjoy gains from CPF Life.
The “9%” number is often used as a comparison benchmark against private annuities and not only are private annuities options unlikely to meet the expectation of a 9% return, other common asset classes that retirees own such as equities, investment grade bonds, high yield bonds and property will be hard pressed to offer a net income return of 9% p.a. as well.
The 9% headline number should be considered with how the scheme works as a whole. In financial planning, when I make a recommendation of an annuity plan, there are other factors that needs to be considered in assessing the returns of the plan.
Here are some common considerations (in simple language) that affects the way returns are evaluated:
1. How long will you receive an income? It can be as short as one year to as long as “lifetime” or as long as you live. Obviously, the longer the duration, the better it is for you.
2. How long will you have to wait to receive an income? The shorter the duration, the better it is for you. Some annuities will offer a higher payout if you are willing to wait longer but assuming that the payout is the same, you will benefit most from an earlier payout.
3. How much of the payout is guaranteed? Not to be confused by a guaranteed payout for life which is a promise to pay for as long as you live, this refers to the amount of income that is guaranteed. Needless to say, the higher the guaranteed percentage, the better it is as there is more certainty to your expected income stream.
4. How much is the total income payout as a percentage of the capital? Obviously, the higher the income, the better as you will have more money to spend in retirement.
5. How much of your capital is preserved upon surrender or death? Ideally, you would want to be able preserve your initial premium or capital and have your capital returned partially or fully upon surrender or death. This can significantly change the calculation for “rates of return” of an annuity plan.
The point is – don’t be taken in so quickly by the “headline income numbers” you see. An annuity purchase is often a six-figure decision and it’s not the type of mistake that you can afford to “write off” without losing some sleep and suffering long-term irrevocable damage to your net worth and balance sheet. Study the details yourself or work with someone who understands how it works.
How then should we think about CPF Life and Private Annuities?
In my opinion, the way to think about CPF Life and Private Annuities is very much like how we think about public and private transport options. There is no doubt that taking the bus, MRT or taxi will cost less but quite often, cost is not the only reason for us in deciding our choice of transport. In fact, many people (myself included) willingly pay more to own a private car because there are other factors that are more important to us such as control, convenience, flexibility, time saving, privacy…etc. And, I use public transport when the occasion suits me such as when I need to go from Tanjong Pagar (where my office is located) to City Hall for a meeting. The answer is not one or the other but rather, when to use which.
If any comparison is to be made, it should be comparing our public transport with the public transport system of other countries. And for the purpose of this read, comparing CPF Life against the pension systems of other countries. In case you are wondering, one such recent comparison ranked Singapore’s pension in the Top 10 out of 44.
While I’m not a big fan of comparing CPF Life against private annuities, I do believe that it is important to understand how private annuities are different from CPF Life and use the differences to create a complementary and well-rounded retirement plan using both CPF Life and Private Annuities.
Features In Private Annuities You Don’t Find In CPF Life
Just like owning a private car can bring many benefits that public transport don’t, a private annuity plan can provide many benefits that CPF Life can’t. Understanding these benefits can help you understand when and how to add on private annuities to complement and supplement CPF Life.
Here are 21 Things Private Annuities can do that CPF Life can’t:
1. Allows you to start income payout earlier before age 65 so that you can slow down to enjoy your “Go-Go” years.
2. Allows you to start income payout later after age 70 so that you can create additional income streams to provide for other retirement needs such as inflation or potential long term care
3. Allows you to invest for potentially higher returns so that your private annuity plan can complement the more conservative nature of CPF Life
4. Provides Insurance benefit upon death so that your capital is preserved for your family as part of legacy planning
5. Provides insurance protection upon disability so that you will receive more income should disability happens to cover the additional money needs that a disability will bring
6. Provides insurance upon Long Term Care (LTC) so that you will receive more income should LTC be needed when you are unable to perform a certain number of activities of daily living and on-going caregiving is required
7. Allows you to change your mind so that should you decided to forgo the initial choice to receive an income and instead prefer to receive a lump sum in retirement, you can do so by surrendering the policy for a lump sum payout
8. Allows you to partially cash out (through policy loan options) from the private annuity policy to cover for temporary and unexpected cash need and having this flexibility can increase the liquidity quotient of your retirement portfolio
9. Allows you to change the life insured so that you can share or pass on the annuity income to a loved one as a form of financial help or legacy gift
10. Allows you to nominate a secondary life insured so that the income stream will continue to benefit a loved one after you pass away
11. Allows for lock-in of investment returns to provide for an increased income payout that is protected even when the market subsequently falls so that you benefit from the upside of investing while being protected from the downside
12. Diversify your annuity returns and risks away from the national longevity pool in which Singapore has one of the world’s highest life expectancy in the world
13. Allows for a shorter payout period when you do not want to plan for lifetime
14. Allows for a small minimum premium allocation of less than $60,000 which is the minimum amount required for CPF Life
15. Allows for a high allocation limit which is much higher than the Enhanced Retirement Sum and this which allows you to allocate as much of your funds as you prefer or need to depending on your overall retirement portfolio needs
16. Allows you to decide exactly how much premium to allocate so that you can customise more intently the most appropriate amount to set aside which can be higher or lower than the limits set for CPF Life
17. Allows you to decide exactly which age you want the payout to start which allows for better customisation to your retirement preferences and needs
18. Allows you to split your premiums into multiple policies which creates even more flexibility without affecting returns
19. Provides a lump sum maturity or surrender benefit so that you can have an additional lump sum to spend in the later part of retirement should you plan to do so
20. Allows for multiple currency options such as USD so that you don’t have to convert your savings from other currencies back to SGD which will help you to minimise any foreign exchange risks and costs
21. Allows you to customise a plan to your unique preference, wants, needs and situation. All the features’ mentioned cannot be found in a single annuity plan or product but rather in over 20 private annuities plans across 5 insurers that I’ve researched into for this read.
This last point is not a feature but a reason and to me, the most important reason why private annuities have a place in almost every retirement portfolio. Just like white rice is the most cost-effective way to fill our stomachs, we seldom (unless circumstances leave us with no choice) have a meal with only white rice and nothing else. Private annuities are not here to replace or compete with CPF Life but rather, to add on customisation to make our retirement meal complete.
Don’t Settle For Ordinary
I’m guessing that like me, you don’t settle for the ordinary when it comes to a holiday. After all, what is the point of taking a holiday when the experience is exactly the same as your “day to day”? You can have a good holiday back packing on a budget or going on a skiing trip without compromise, the key is not what it costs but that it’s not ordinary. Only when it’s not ordinary will it allow us to appreciate life a bit more.
Your retirement may well be the longest holiday you are ever going on and my wish is for you to have an extraordinary retirement that brings enjoyment, appreciation and gratitude.
Make it a great one!
Article by Lee Meng Choe
The writer is the Executive Director (Advisory) of GEN Financial Advisory