Will Retiree Be Better Off With Annuity Or Rental Income?

Source : The Sunday Times, Mar 30, 2008

Q I AM wondering if I should continue to rent out my property or dispose of it and use the proceeds to buy an annuity that will provide a retirement income.

Rentals will rise with inflation while an annuity is more or less fixed and will not keep up with inflation.

Being a landlord, however, also has its minuses. As the property gets older, repairs and maintenance will get more costly. Also, in a recession or if supply exceeds demand, rentals will fall.

What would you advise?

A IN RECENT months, property investments and annuities have generated much debate among Singaporeans.

Improper management of these financial vehicles could have an adverse impact on your retirement plans, so let us look at the key characteristics of these two asset classes.

Property investments are popular because of their potential capital gains. In a boom cycle, they offer attractive capital appreciation. In contrast, annuity products have no potential for capital gains.

On the income side, rentals fluctuate as demand and supply conditions change. Thus, property investments may not be able to provide the constant and predictable cash flow that annuities can.

This uncertainty could be painful for retirees who rely solely on rentals for their retirement income. Furthermore, repairs and maintenance are unavoidable and potentially troublesome.

The most attractive benefit of an annuity is that you have a guaranteed stream of regular income throughout your lifetime. You need not worry about outliving your savings. This makes annuities an apt choice for many retirees.

Also, the introduction of the National Lifelong Income Scheme, or CPF Life, which is essentially an annuity scheme, allows you to explore more ways of generating a retirement income, as you can pledge your property towards the Minimum Sum.

If you sell a property that has been pledged, the money from the sale of the property would be returned to your Minimum Sum. This could then be used for an additional stream of income for life.

In your case, this certainly sounds like good news. You can keep your pledged property for rental income and enjoy any market upside, while the monthly payout from the Lifelong Income scheme covers your basic living needs.

When planning for retirement, you must first ensure that your minimum cost of living over your lifetime is provided for - in this case, with an annuity product. Indeed, the CPF Board has effectively addressed the basic retirement needs of many Singaporeans with the Lifelong Income scheme.

You can supplement your income by investing in other asset classes, such as pension endowments, real estate investment trusts or dividend-paying stocks. You can even take up an additional private annuity.

A well-diversified retirement portfolio will provide a staggered stream of income from various sources as you get older. As it is becoming increasingly common for people to have more than one source of retirement income, it is important to manage all these financial instruments properly.

I would advise you to engage a professional financial planner to work out your retirement expense cash flow and assess how your annuity or rental income can complement your current retirement portfolio as a whole. Do this before you decide to sell your property , buy a private annuity or choose a CPF Life option.

Xanne Leo Sen Yun
Associate Manager, New Independent

Advice provided in this column is not meant as a substitute for comprehensive professional advice.