What Exactly is An Annuity?
If you have read about retirement planning in Singapore, you would have come across the terms ‘annuity’, ‘annuity plan’ and ‘private annuity’ or what insurers call a retirement income plan. To put it simply, an annuity is an insurance product that pays out a guaranteed lifetime income and can be used as part of a retirement strategy. For almost all Singaporeans, they would have an annuity when they retire and it is called CPF Life. However, because CPF Life payouts are usually inadequate to fund a better than basic retirement lifestyle, this is where private annuity plans come in to boost your retirement income.
How Does An Annuity Work?
An annuity plan allows you to allocate either a lump sum or a fixed monthly or yearly premium for a specific payment duration. The premiums that you contribute are pooled together with other policyholders’ monies. The insurance company reinvests this sum in the hope of making higher returns. A large portion of the funds are usually invested in bonds which is a safer investment asset class. In return, most plans guarantee the capital and also pay a non-guaranteed bonus as well. In other words, you are essentially transferring the risk of volatility to the insurance company and still get to enjoy the upside. At your chosen retirement age, you will receive a guaranteed (and a non-guaranteed, if applicable) retirement income on a monthly or annual basis. The payouts can last 10, 20 years, or for life, depending on the chosen plan.
The Different Types of Annuities in Singapore
1. Immediate Annuity
As the name suggests, when an immediate annuity is purchased (usually with a lump sum upfront), the income payouts start immediately, either monthly or yearly. It is most suited for people who are a few years away from their desired retirement age.
With a deferred annuity, there is an accumulation period before payouts commence. The accumulation period could be, for example, 5, 10 or 15 years. People who have time on their side would usually go for a longer accumulation period as this would allow their money to grow further.
3. Lifetime Annuity
A lifetime annuity pays out an income for as long as the person lives. This removes the risk of outliving one’s resources during retirement. One could also get a lifetime annuity on his own life and later on, transfer ownership to his child or even grandchild. This is to extend the period of payouts, and in turn, leaving a legacy for future generations. What if premature death happens? Will the beneficiary receive any money? It is very likely there would still be a death benefit payout. In most cases, the regular payouts along with the death benefit would at least add up to the total premium you have paid towards the plan.
4. Fixed Period Annuity
A fixed period annuity pays an income for a pre-defined period of time. It is typically 10, 20 or 30 years. The 30-year payout option may not make sense to most people but think again – the average life expectancy of Singaporeans is 84.8 years old! (Source: The Burden of Disease in Singapore 1990-2017 report by the Institute of Health Metrics and Evaluation in the United States in collaboration with the MInistry of Health). If one were to take things slower at age 55, the 30-year payout plan makes perfect sense. With fixed period annuity, there could also be an additional non-guaranteed payout at maturity.
5. Single Premium Annuity
This refers to an annuity plan that is funded by a single premium payment upfront.
6. Flexible Premium Annuity
This refers to an annuity that is funded by a series of premium payments on a regular basis, from the start of the plan up till the intended age before retirement. The most common type of annuity or retirement income plan in Singapore combines the features of a deferred annuity with a fixed payout duration and flexible premium structure.
Annuity plans have evolved with the current times and have incorporated features and benefits that cater to different needs. In layman’s terms, these are the types of annuities that you can buy in Singapore:
Do remember that an annuity income is not to replace other investment income such as dividends from shares or rental from properties. Instead, it is to complement your investment income – the guaranteed nature of annuity income will provide the security and stability for you to hold on to your investment assets during a severe market correction and hence, averting a situation where you have to force liquidate your assets.
Choose a retirement income plan based on your needs. Most importantly, you must first have a retirement plan in place!
Retirement planning is not a DIY activity. You will require the financial planning expertise of a Certified Financial Planner to help you secure a comfortable and realistic retirement plan.
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