Karen Tang, CFP®: Certified Financial Planner in Singapore

What You May Not Know About Private Annuities – 17 Aspects To Consider

What You May Not Know About Private Annuities - 17 Aspects To Consider

When we talk about private annuities, it is more often than not that Singapore’s national pension scheme, the CPF Lifelong Income For the Elderly (a.k.a CPF LIFE), will be part of the conversation.

CPF LIFE is a national longevity insurance annuity scheme that provides Singaporeans and Singapore Permanent Residents with monthly payouts for as long as they live. It is an integral part of our retirement planning. It aims to provide for our basic essentials during retirement. As the required CPF savings to participate in this retirement scheme involves a six figure sum, it is thus important for us to carefully consider the amount to set aside as premium. If you envision a more comfortable retirement lifestyle, then more meticulous planning has to be done to ensure you can achieve your desired goal.

The recent 2024 Budget announcement on CPF changes brought greater attention to the scheme. CPF Life is essentially a retirement plan. If you are thinking of topping up to the Enhanced Retirement Sum or ERS (which will be 4 times the Basic Retirement Sum or BRS in 2025), give yourself some time to make an informed decision.

The CPF LIFE annuity purchase is a six-figure commitment and few can afford to make a mistake and suffer long-term irrevocable financial detriment.

This is not to say that CPF LIFE is not a good scheme – to many of us, it serves as the foundation of our retirement plan. If you have the time & aptitude, study the details yourself. Otherwise, seek professional guidance and advice so that you take this step with full understanding and clarity i.e. how this decision affects your cash flow and balance sheet.

Now, back to private annuities. The question on most people’s mind is the kind of returns that one can expect from such a plan. To answer this question, we have to look at several things that can impact returns.

Common considerations that impact the way returns are evaluated:

How long do you have to wait before payouts start?
The shorter the time frame, the better it is for you. Some annuities offer higher payouts if you are able to wait it out, just like CPF LIFE which offers a higher payout if you delay payout age to 70, But if the payout is the same whether it is earlier or later, then it only makes sense to start receiving money earlier. 

How long will you receive the income for?
It can be as short as a few years to as long as your “lifetime” (as long as you live). With life expectancy of around 81 years for men and 85 years for women (source: SingStat 2022), we need to ensure that we do not outlive our resources. Therefore, the longer the payout duration, the more beneficial it is for you.  

How much of the payout is guaranteed?
With private annuities, each payout typically consists of a guaranteed and a non-guaranteed portion. It goes without saying that the higher the guaranteed percentage, the better it is as this means more certainty in your expected income stream during retirement.

How much is the total income payout as a percentage of the capital?
Clearly, the higher the income, the more advantageous it is for you as you will have more liquidity to enjoy the things you want to do in retirement.

How much of your capital is preserved upon surrender or death?
Ideally, you would want to preserve your initial premium or capital and be able to get it back partially or in full. This can significantly affect the rate of return calculation of a private annuity plan.

My take is don’t be too caught up on the returns of a private annuity plan. There are other aspects that make it worthwhile for you to include it in your retirement portfolio.

Understanding how private annuities are different from CPF LIFE

Though I am not a big fan of comparing CPF Life against private annuities (because it is not an apple-to-apple comparison), I believe that it is important to understand how private annuities are structured differently from CPF Life. And use these differences to create a complementary, well-rounded retirement planning approach by incorporating these two retirement planning solutions.

I have clients who have retired successfully and they were able to achieve this with a strategy consisting of CPF LIFE, private annuities and investments. 

Features & benefits of private annuities that are not available in CPF LIFE

Similar to how owning a private car offers advantages that public transportation does not, a private annuity plan can offer benefits that are not available in CPF Life. Recognizing these advantages can aid in understanding when and how to incorporate private annuities to enhance and supplement CPF Life.

Here are 17 things that private annuities can do that CPF LIFE can’t:

1. Allows you to commence income payouts earlier
A private annuity allows you to decide exactly which age you want payouts to start. This means better customisation to your retirement needs and preferences.

Instead of age 65, you can choose a payout age starting at age 55, 60. It is not uncommon these days to have clients tell me they wish to retire at 55. This can be a reality and it boils down to planning early enough and doing the right things and making smart decisions with your money.   

2. Allows you to receive income payouts later i.e. after age 70
Looking at the big picture of your retirement plan, specifically where your various income streams are made available to you, you can decide when to commence the private annuity payouts. There could also be other factors that influence your decision, for example, your health status and providing for long term care.

3. Allows you to invest for potentially higher returns
Your private annuity can be a good complement to the more conservative nature of CPF LIFE.

4. Provides insurance benefit upon death
This means that your capital is preserved for your beneficiaries (your family) as part of legacy planning.

5. Provides insurance protection in the event of disability
Should disability occur, you can receive additional money to tide over the increased need for cash.

6. Provides coverage for Long Term Care (inability to perform Activities of Daily Living)
Long Term Care becomes increasingly relevant as we age. This additional income will come in handy to pay for medical expenses and on-going caregiving. On a side note, long term care can also be purchased as a stand-alone plan.

7. Accommodates a change in decision to receive a lump sum versus a stream of income
At point of purchase, you had initially chosen to receive an income. But now, you would prefer to receive a lump sum at the chosen payout age. In doing so, you are effectively surrendering the policy in exchange for the lump sum payout.  

8. Allows you to cash out (via policy loan facility) a portion of the accumulated cash value to meet unexpected cash flow needs
Unlike CPF LIFE, this flexibility can be a God sent in times of need. It can also help to up the liquidity quotient of your retirement portfolio.

9. Allows you to change the life insured
You can pass on the annuity income to a loved one as a form of legacy gift or to give them a boost in their finances.

10. Allows you to nominate a secondary life insured
This means that the income stream will continue to benefit a loved one after you pass on.

11. Allows for investment returns to be “locked-in”
Even when the markets dip, the increased income payout can be protected so that you can benefit from the upside of investing while being protected from the downside.

12. Diversifies your annuity returns and risks away from the national longevity pool
It is advisable not to put all your eggs in one basket. CPF LIFE has its constraints and limits. So, it makes sense for us to stay financially agile by investing in other suitable options.

13. Allows for different payout period
For those who do not want lifetime payouts, they can opt for shorter payout period like 5, 10, 15 or 20 years.

14. Allows for a smaller minimum premium of less than $60,000 (less than the minimum required for CPF LIFE)

15. Provides option to allocate a higher limit (higher than the Enhanced Retirement Sum)
Depending on your overall retirement portfolio needs, you have the freedom to invest according to your preference or need. You can customise more intently the most appropriate amount to set aside which can be lower or higher than the CPF LIFE limits.

16. Allows you to split your premiums into multiple policies which creates even more flexibility without affecting returns
This also provides you the option to specify different payout timings. For example, policy #1 can start paying you at age 55 and policy #2 at 60.

17. Provides a lump sum maturity or surrender benefit
This is so that you can have an additional lump sum to spend in the later part of retirement should you plan to do so.

In summary

A private annuity allows you to customise your own unique plan according to your preferences, wants, needs and situation.

All the features and benefits mentioned above are NOT found in a single private annuity solution. Instead, they are spread over 20 different private annuity solutions in the market across more than 4 insurers.

Lastly, it is my conviction that private annuities have a place in almost every retirement portfolio. They serve a purpose and along with that, provide benefits that are relevant and essential during our golden years. They are not here to replace CPF LIFE. Their role is to complement the national scheme, so that we can remain agile, and retain flexibility in how we want to manage our retirement income. 

Let’s secure your retirement

If you would like to have a chat to learn more about private annuities, reach out to me at +65 6528500 or https://karentang.sg/consultation/.

If you are at the pre-retirement phase i.e. 5 to 7 years away from your planned retirement and you want full clarity on your retirement preparedness, I will be happy to analyse your cash flow and net worth and identify any shortfalls (and at what age), gaps and ‘blind spots’ that you may have missed out. 

Plan your retirement like you’re planning the holiday of a lifetime!

When we spare no effort to make our vacation an awesome one filled with new experiences and precious memories, how can we not pay more attention to our own retirement plan? Your retirement may well be the longest holiday you are embarking on.

And my wish for you is that you can have an enriching and fulfilling retirement that brings much enjoyment, thanksgiving and gratitude. 

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