Annuities Are One, But Not Only, Solution

Source : Weekend TODAY, August 25, 2007

ITS history can be traced to the United States in 1740, when the Presbyterian Church gave regular payouts to provide for the needs of the clergy and widows till the day they died.

Now, annuities are set to be a permanent feature of Singaporeans’ lives, as the Government looks to make it compulsory for the nation’s rapidly ageing population.

Earlier this week, Manpower Minister Dr Ng Eng Hen said the scheme would call for a small portion of the Minimum Sum in the Central Provident Fund (CPF) to be used as premium for an annuity.

This would supplement the current Minimum Sum payout — which typically lasts for 20 years till age 82 — by providing members with a subsistence sum of about $250 to $300 by present-day standards, said Dr Ng.

Experts, however, feel an annuity alone is not the sole solution to retirement needs.

What is an annuity?

A contract to provide the annuity-holder with a tax-exempt guaranteed income for life or for a specified period of time after a person retires, which is currently at age 62 for Singaporeans.

Currently, CPF members can buy a life annuity from any of eight insurers (AIA, Aviva, Great Eastern Life, HSBC Insurance, NTUC Income, OAC, Prudential, TM Asia Life), or from the three local banks (DBS Bank, United Overseas Bank, OCBC Bank) with their statutory Minimum Sum when they reach 55.

But last year, only 4 per cent of those who turned 55 did so, said the Life Insurance Association.

NTUC Income said most people who deposit the full Minimum Sum prefer to receive a flat $790 every month from the CPF Board over 20 years.

“They think that they might not live till age 82, but statistics show that more people in Singapore are living up to 85 and beyond as life expectancy keeps improving,” said a spokesman from NTUC Income.

To plug this gap, financial consultants generally recommend an annuity that would pay out for life. But the longer payout period comes with a lower monthly payout sum.

“For the current CPF minimum sum of $99,600, Great Eastern provides a guaranteed sum of $535.35 per month from age 62 onwards if you are a male, and $494.26 if you are a female,” said Mr Tan Hak Leh, managing director (Singapore) of Great Eastern. “However, for most individuals, this guaranteed sum might not be enough.”

NTUC Income said it was exploring “more innovative forms of annuities”, which would allow regular contributions from an early age.

Presently, the insurer has an annuity option for its existing regular premium whole-life plans, where policyholders can convert their existing cash value to an annuity upon reaching the age of 60.

“An annuity kicks in to provide a stream of income during the actual retirement years, but the question is how much lumpsum money one has at that point for an immediate annuity, or at a point of five, seven or ten years before that to buy a deferred annuity?” said Mr Mark O’Dell, president of the Life Insurance Association.

“Ideally, one can say that the “accumulation stage” should begin as you start working. Start small but long-term interest rates compounded over 20, 30 or 40 years can go a long way to grow the money
you earmark for retirement.”

Mr Stephen Chew, principal consultant with Summit Planners Advisory Group, agreed an annuity is the best form of insurance to cater for retirement due to the guaranteed income.

But “returns from annuities are usually not as attractive when compared to other forms of retirement funds, for example endowment funds, which do not have a guaranteed feature but offer higher returns in the long run,” he added.

Industry experts, therefore, advise individuals to consult their personal financial advisers and to adopt a holistic approach when setting up a retirement fund by using a combination of financial instruments.

This includes the CPF minimum sum, cash savings, insurance policies and reverse mortgage or downgrading one’s property to monetise capital gains.

“It is difficult to pin down a percentage of each portion to cater for retirement,” said Mr Chew.

“The amount payable from CPF is quite constant. As for the rest, it depends on many factors such as type of employment, profession, family structure, cash flow and desired retirement needs.”