Using HDB Equity To Pay For Annuities

Source : The Business Times, October 31, 2007

The median CPF member holds three times more in HDB housing equity than CPF cash holdings

A NEW scheme making annuities compulsory for Central Provident Fund (CPF) members has been greeted quite negatively by the public.

A smoother road for retirees: HDB can play a financial intermediary role for the elderly and the government should also help citizens monetise their savings locked into HDB housing at the end of their working lives

The scheme involves setting aside a small portion of the Minimum Sum to buy the annuity. When the individual reaches a certain age, say 75 or 80, the annuity gives a monthly payout for the rest of his life. The annuity is a form of longevity insurance.

One option of making annuities more palatable is by allowing CPF members to finance the annuities with their HDB housing equity. The median CPF member holds about $145,000 in HDB housing equity, more than three times the $45,000 in CPF cash holdings.

Retirees are generally asset rich but cash poor. Using the cash portion to purchase annuities would leave even less cash for retirement. That may not be the most optimal financial solution for most CPF members who are already holding a large portion of illiquid assets, their HDB flats, at retirement.

By design, the government's social support and CPF system encourages citizens to invest their savings in housing during their working lives. We recommend that the government should also help citizens monetise their savings locked into HDB housing at the end of their working lives.

One option is for HDB to accept the pledging of the retiree's HDB flat as collateral for a loan to purchase the annuity. This would allow HDB owners to partly monetise their assets and leave them with more cash at retirement. Such flexibility on HDB refinancing would also allow CPF retirees to stay in their existing HDB homes without necessarily having to sell their homes for the purpose of realising their savings.

Moreover, moving or downgrading from their existing homes can be a stressful experience for the elderly.

HDB can clearly play a financial intermediary role for the elderly. Retirees are not able to secure housing finance from private banks because they no longer hold a job, have a stable monthly wage, or are simply too old.

Retirees do not, moreover, want to completely reverse mortgage their HDB homes as they may want to leave an endowment and pass on some residual housing equity for the next generation. The retiree can also live on in his existing home for the rest of his life, if some refinancing is allowed.

From the perspective of the government, lending to an individual for the purchase of an annuity is probably more acceptable.

The withdrawal of the HDB housing equity is not for cash that will be wastefully spent. Allowing the housing equity to be tapped for buying longevity insurance improves the welfare and financial security of the individual. Such an option might improve the public reception to the compulsory purchase of annuities.

The writer is an economist with Citigroup and chairperson of the Policy Study Workgroup on Economic and Employment Opportunities