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Post Info TOPIC: Annuity
KK


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Annuity
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Extracts fm TODAY dated 18 -Oct-05,


How to choose an annuity plan

It is important for you to know the basic features before you buy one

ANNUITIES have been suggested as the way to go for Singaporeans' retirement, after the Prime Minister brought up the topic to study annuities as a CPF investment option last month. Hence, if consumers are intending to purchase annuities, they should be aware of some basic features. Annuities are investment products, not insurance products, although they are generally sold by insurance companies and linked with whole-life insurance. The purchaser of an annuity pays a lump sum in return for a guaranteed income until death. If one lives longer than the provider expects, one would have made a profit. However, if one dies sooner, the provider may not return any money to one's beneficiaries, although some annuities guarantee to return the whole sum invested to a beneficiary if one dies before withdrawing any money.  

According to a personal wealth guidebook from Citibank, below are the various types of annuity: 


  • Temporary annuities pay income for a fixed number of years 
  • Deferred annuities begin payment at a fixed date in the future. Some types allow a series of premiums to be paid, so they can be used as a way of saving up for a future stream of payments. 
  • Refund annuities refund the beneficiary with the difference between the purchase sum and the benefits that have already been paid out if the person who buys the annuity dies. 
  • Variable annuities are a kind of deferred annuity that allows one to choose from a range of investments (usually unit trusts) within the scheme. This gives the consumer a little more control over diversification and potential return, but charges can be considerably higher than if one invested in mutual funds outside such a scheme.
Are annuities for you?
 "Overall, the purchase of a life annuity with your CPF is good for people who don't have the time or expertise to invest their money since they get a guaranteed monthly income," said Financial Planning Association of Singapore president Paul Stefansson. Unless they have the time and expertise to invest their own money, it is better for an average person to use the expertise of the financial company managing it — that is, buy a life annuity with reasonable expenses, he said. "People think that investing is easy but this is not the case. Many people who invested their CPF funds did not even earn 2.5 per cent," Mr Stefansson noted. For those who want to design their own annuity, they can create their own portfolio by investing in, say, fixed income instruments, he said.
 Consumers should note, however, that annuities have some drawbacks, such as not being adjusted for inflation. "A lot of them don't (adjust for inflation) because it is very expensive … the more features you put in, the more expensive it gets, so the less gratuities you get per month" said Mr Stefansson. In addition, people who are not confident of living past the guaranteed years may find the product unsuitable. "If you're not too sure that you can outlive the minimum guaranteed years, which is typically 20 years, then it may not be attractive to you," said Mr Victor Wong, a representative from Financial Alliance, a local financial advisory firm.
 Secondly, there is also the opportunity cost of money parked in the annuity, which cannot be withdrawn in cases of emergency, or when one chances upon better investment opportunities later in life, Mr Wong added. "The investment returns from annuities are usually not high, based on historical returns. Compared to the CPF guaranteed rate of 4 per cent per year, the returns from private annuities are less attractive," he said. Assuming that CPF payout is lowered to $500 per month, which is still higher than what most annuities pay out per month, the payout period could stretch up to 38 years instead of the current 20 years, noted Mr Wong.  

Customising your annuity plan

In general, a life annuity can be designed to have any of these features: 


  • Single life pays while you are alive 
  • Joint life pays while you and your spouse are alive 
  • Inflation indexed provides monthly income increases with inflation. It guarantees to pay for a specific number of years. In case of death, there will be something for the investor's beneficiaries.
The joint life, inflation indexed, and guaranteed factors add to cost or in other words reduce your monthly annuity income, noted Mr Stefansson. The three factors that affect the price of a life annuity is the rate of return on the underlying investments, the general population's mortality, and the expenses. Since expenses can have a massive impact on return and monthly income, it is very important that the expenses are fully disclosed. High expenses can turn a good life annuity into a bad investment, Mr Stefansson said.
 As a guideline, consumers should shop around before purchasing annuities, and buy the product which gives the highest monthly payment, suggested Mr Stefansson.

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Extracted from Today Newspaper.

Why buy an annuity?

By Larry Haverkamp
October 18, 2005

ON 25 Sep, Prime Minister Lee Hsien Loong announced that the Government is studying methods to boost CPF members' investment returns.

Plans will be announced within a month and implemented over the next one or two years. Two new initiatives are likely.

# First, a Private Pension Plan (PPP). Likely to be an opt-out plan in order to get enough participants to keep costs low.

Of the more than 400 CPF-approved funds (unit trusts and ILPs), most have high expense ratios. On average, they charge 3 per cent on your investment per year. It is double what is charged in other countries, like the US.

This is a key reason why more than 70 per cent of CPF-approved funds have failed to earn more than the ordinary account's 2.5 per cent over the past 10 years.

The new opt-out PPP would change that. Its expense ratio would likely be close to the lowest-cost fund in the market - 0.3 per cent.

IS AN ANNUITY FOR YOU?

Second would be an opt-out scheme for annuities. At present, fewer than 10 per cent of eligible CPF members buy an annuity.

Most receive the CPF Board's 20-year payout of the minimum sum - $90,000. It pays you $711 a month from age 62 to 82, good enough for most since only 35 per cent of us are expected to live beyond age 82.

Your other choice is to buy an annuity from one of seven insurers. The average fixed payout is $446 a month for life vs CPF's $711 a month for 20 years.

Therein lies the trade-off: Lower payments for life (annuity) vs higher payments for 20 years (CPF). Which is best?

Before I give you the answer, consider the alternatives.

At age 55, your special account money is transferred to a retirement account where you have three choices: leave your retirement account with the CPF Board; put the money in a bank fixed deposit or buy an annuity from an insurance company.

Here is my recommendation:
# Do not put the money in a bank fixed deposit. It pays the least.
# Do not buy an annuity at age 55. Instead, defer your purchase until just before you turn 62. That way you can continue to earn your retirement account's risk-free 4 per cent interest from age 55 to 62. It is more than what an annuity pays.
# Just before age 62, you must decide whether you need to buy an annuity. The answer seems clear: No. The CPF Board's $711 a month for 20 years is too good a deal.

It takes 30 years - from age 62 to 92 - for the typical annuity at $446 a month to add up to CPF's $711 a month paid over 20 years. Nearly everyone will get a larger payout by leaving their $90,000 retirement account with the CPF Board.

Only 2 per cent of the population will receive a higher payout from an annuity by virtue of living past 92 years of age.

One big exception is NTUC Income's variable annuity. It has 50 per cent of the market and pays considerably more than other annuities.
NTUC Income's annuity is the best

AT first glance, NTUC Income's annuity isn't anything special. It guarantees $458 a month compared with $446 a month for the average annuity. There isn't much difference.

What makes NTUC Income's annuity special is that it includes a 2 per cent non-guaranteed annual bonus. This changes its annuity from 'very average' to 'quite generous'.

That extra 2 per cent boosts its total payments to $153,600 over 20 years (from age 62 to 82).

Still, this is less than CPF's 20-year payout of $170,000. It suggests you are better off staying with CPF and taking its total payments of $170,000 vs NTUC Income's $153,600.

Surprisingly, this is the wrong conclusion.

CONCEPT OF INSURANCE

It is because of the concept of insurance. At all costs, we want to avoid reaching old age without a dollar in our pocket. As you can imagine, it isn't easy finding a job when you are 90 years old.

An annuity ensures that your life won't end on such a sad note. The CPF Board's total payments are fixed at $711 a month for 20 years. It totals $170,000. At age 84, NTUC Income's annuity catches up with CPF Board's $711 monthly payments. At that age, both payouts total $170,000.

Should you be fortunate enough to last until age 92, NTUC Income's payments will total $256,500. It far exceeds CPF's $170,000.

The dollars, however, tell only half the story. The other half is the insurance and peace of mind that an annuity buys. It guarantees that you won't die broke.


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KK


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Extracted fm Tan Kin Lian's Blog,
Buying an annuity is a good option!12 October 2005

I refer to the letter "Buying an annuity may not be the best option" by Dennis Ng Kah Wan (St Times, 7 Oct 2005).

Mr Ng said that if he keeps the minimum sum of $90,000 with the CPF Board, he will get a monthly payout of about $711 at the age of 62 for 20 years. He said that if this sum is invested in a life annuity, the payout will be between $398 and $483, depending on which annuity plan you choose and whether you are male or female.

Under the annuity plan now offered by NTUC Income, we pay a guaranteed monthly sum plus bonus. The bonus is determined yearly based on the average yield earned on the investments in recent years. Over the long term, we expect the bonus to vary from 1% to 3% per year, but this is not guaranteed.

If the $90,000 is used to buy a life annuity at age 55, we expect to pay a monthly sum of $543 from age 62, comprising of a guaranteed sum of $473 and an estimated bonus of $70. The monthly annuity will continue to increase each year based on the bonus declared for that year. Assuming an average bonus of 2% per year, the monthly payment is expected to reach $662 at 72, $807 at age 82 and $984 at age 92.

The life annuity offers two attractions:

- it is payable for the lifetime of the annuitant
- the payment will increase with bonus in most years, providing a cushion against inflation.

From actuarial statistics, about 30% of male and 40% of female are expected to live beyond age 82. This proportion is expected to increase in the future, due to longer life expectancy.

Over 25,000 people have bought a life annuity from NTUC Income. A large proportion of them invested their CPF minimum sum with us. They do not wish to take the risk of living beyond age 82 and running out of money. We have a market share of 65% of all life annuities sold in Singapore. The remaining 35% are shared among 5 other
life insurers.

Tan Kin Lian
Chief Executive Officer
NTUC Income

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