by Chris Kuan
A few friends who did not work in the financial industry and are in their late 40s or early 50s asked me about retirement income proposition. I had advised with the caveat that I am not a financial planner and through gritted teeth that they should start putting monies into deferred annuities. The way these work is that you pay into the product by installments for a period of time say 10 to 15 or even 20 years, at the end of which the product pays out a monthly income for 10 or 20 years at end of which there is a lump sum repayment of residual value. So there is more flexibility than CPF LIFE as you can time the draw down age. My friends mostly timed theirs to 60.
Why gritted teeth you may ask?
First, the return isn’t good but this is Singapore, the long term risk free rate is held down by CPF monopolizing long term savings.
Secondly and more importantly, is that although more flexible than CPF LIFE, the annuities on offer are narrowly prescribed and inflexible in comparison to the annuities markets around the world. For example, there is no immediate annuities (except one from NTUC) which is crucially important for flexibility. An immediate annuity starts paying out the year you pay a lump sum to purchase – hugely significant for those who need a retirement income well before the CPF LIFE drawdown age of 65.
Third, unlike other markets, there is no whole life annuities (except the same one from NTUC), i.e. annuities that pays an income until you pass away. The Singapore type deferred annuity provides a lump sum residual value payment at the end of the drawdown phase which means at an old age you are faced with an reinvestment risk.
Fourthly, there are no options such as inflation-indexed payouts, joint life annuities, step up or step down annuities. I understand the issues with the second and third factor are due to Monetary Authority of Singapore’s regulations. If so, I see these regulations as repressing competition to CPF and NTUC.
Finally, a deferred annuity is really two products rolled into one. The build up phase where you pay installments into the product works like a pension fund or an endowment. The drawdown phase is really the annuity. By lumping them together, the provider is essentially locking you into two products and hence prevents you from shopping around for the pure annuity product.
It can be argued that one cannot shop around because there isn’t any immediate annuities on offer. That is correct but the regulatory set up and the way the products are bundled together is anti-competitive.