What happens to the interest of those who choose their CPF Life plan at 55? Will actuarial report for CPF Life be ever made public?

Financial commentator and former banker Chris Kuan recently wrote on his Facebook page, “Enough of the PAP, onto the cybernutocracy. Top alt media financial blogger asked “Do you know that CPF Life eats up all you accumulated interest if you die early?” Geronimo, what a freaking revelation!”

For those who are unaware, Chris is referring to the post by Leong Sze Hian which highlighted the differences of stance by the Central Provident Fund board on CPF Life payouts.

The post noted that on “areyouready.sg“, it writes, ” the interest earned on annuity premiums does not form part of the individual member’s bequest as it is paid into the Lifelong Income Fund to provide lifelong monthly payouts to all members under CPF LIFE.” while on the official CPF website, it writes, “You and your loved ones will always get back at least the amount that you have put into CPF LIFE, in the form of payouts and/or bequest, no matter what age you live to.”

Noting that the explanation in the official CPF website may be somewhat misleading as it may give the impression that one may get more than what you have put into CPF Life if you pass away early, whereas the fact of the matter is that “the interest earned on annuity premiums does not form part of the individual member’s bequest”.

Chris goes on to state,

Of course, it does, Annuity is risk pooling, which does 2 things – 1) to lower the financial risk of longevity by averaging out those who die early and those who die later but you never know if you are the former or the latter 2) to generate a higher income, i.e. the annuity income drawdown rate is always higher than the rate of return used to calculate the drawdown. Okay don’t expect the man in the street to know this but a financial blogger? The article is political polemic.

Bequests are what make CPF LIFE payouts lower than they can be. But I don’t know if this fixation with bequests is due to Singaporeans’ wishes or some dastardly plot by the government to limit old age subsidies by deriving two-way intergeneration financial flows e.g. children supporting parents, in return parents bequest when they die. Probably both. By the way, my view is that the Minimum Sum and CPF LIFE is about CPF partly moving from being an outlier to the mainstream of state mandated pensions, more on this next time.

Giving his response to Chris’ comments, Leong clarified,

The issue as I see it, is that most Singaporeans may not know about that and may have a wrong impression on the plan. Also, it may arguably be misleading because the answers to the same question – “What happens if I passed away early?” are quite different.

One gives the impression that you will get at least your upfront premium paid, whereas the other says you will not get anything more than your premium.

Also, I understand when CPF Life was first implemented, one had to choose the CPF Life plan at age 55, and this was subsequently changed to “choose” anytime before age 65.

So, does this mean that those who had to choose at 55 under the old rules may have their accumulated interest eaten up from age 55, or from age 65 under the rules now?

If the actuarial report for CPF Life was made public – which many have been asking over the years – we can see what are the assumptions and methodology used.

Leong goes further to remind people that when one buys a life annuity from an insurance company they will normally ask if the customer wants a premium refund type or 15-year guarantee which guarantees at least 15 yrs payout to beneficiaries if one were to die early.

While in the case of CPF Life, the plan that is offered is a premium refund type with the choices being:

  • CPF Standard – higher payouts but a lower bequest
  • CPF Life Basic – lower payout but a higher bequest
  • CPF Extended – starting low payout but pays 2% more each year

He noted that most people will likely choose the 15 yr one when they see the year to year table in terms of payout.