Let's face it: Whether or not we have a secure retirement plan depends on the decisions we make today. By offering a fixed source of income in your golden years, annuity plans are the lifeboats you need to help you through difficult times.
The following article walks you through retirement annuity plans, explaining why you need them, what they are, and what to look out for.
How A Retirement Annuity Plan Works
Retirement plans, often known as annuities, are created to lessen the likelihood that you would outlive your savings after retirement. Most retirement plans offer a steady monthly income throughout your whole life.
You pay a set monthly or one-time premium payment throughout your working years.
Depending on the plan you chose, you will then be able to benefit from monthly payments when you reach a set age for either a lifetime or a specific number of years.
With other types, you can get payments during the insurance's last few years or a sizable lump sum payout when it matures.
Depending on your needs and budget, there are a number of solutions that are suitable for you.
It is always recommended to consult a trained independent financial advisor in order to receive the best guidance.
Also, Singaporeans are automatically enrolled in either the CPF retirement schemes or CPF Life – which makes monthly payments to you as soon as you reach the payment eligibility age.
Why You Need A Retirement Annuity Plan
1.) CPF Life payouts may be insufficient
if you are a Singapore Citizen or Permanent Resident born on 1 January 1958 and after, you’ll be enrolled in CPF Life. CPF Life is an annuity that pays you a certain amount for as long as you live.
The maximum monthly withdrawal, however, varies depending on your CPF amount (how much you have in your retirement account at 65) and the payment method you choose.
The table indicates the expected monthly payout you can expect from CPF Life depending on your retirement account savings.
Sourced from CPF
Do note that these estimated monthly payments are based on the CPF LIFE Standard Plan and were calculated as of 2022 for members who turn 65 in that year. Payouts may also be changed to reflect long-term changes in life expectancy or interest rates.
If you feel that this amount would not be sufficient to sustain your retirement years, retirement annuity plans are for you. It is essential for you to start preparing as soon as you can since you have the option to acquire as many of these annuity plans as you’d like.
2.) Receive payouts early and have more control over your retirement strategy
Once you turn 65, you begin receiving monthly payouts from CPF Life. But as CPF LIFE benefits are only accessible until age 65, Singaporeans favour private annuities.
As such, having the chance to receive payouts early may make purchasing retirement plans more attractive.
Therefore, retirement plans may be used to complement CPF Life if you would rather have more flexibility and control over your retirement plan.
Also, you can retire earlier if a retirement plan permits you to start receiving payments at your desired retirement age.
With some plans, it can even happen as soon as a year after you pay premiums.
3.) Retirement plans offer insurance coverage for Death, terminal illness, permanent disability etc.
Second, their coverage might not be adequate. Only $400 per day of hospitalization or $300 per day of hospitalization for day surgery are covered by Medisave.
However, depending on the hospital and ward class, hospitalization bills are increasingly more expensive.
While Medishield Life is intended to offer protection against Class B2 or C hospital expenditures. Only a tiny percentage of your expense will be paid by Medishield Life if you are admitted to a Private, Class A, or Class B1 ward.
You are responsible for the remaining costs, which could be hefty. For this reason, it is crucial to arm yourself with extra insurance.
Retirement plans offer insurance coverage for Death, terminal illness, or permanent disability for instance. This is vital in supplementing your income and alleviating any possible financial stress on your family.
What To Look Out For In A Retirement Annuity Plan
The following are the essential elements that every retirement annuity plan has to have.
Guaranteed vs Non- Guaranteed returns
Retirement plans usually highlight two categories of returns —guaranteed and non-guaranteed returns.
Guaranteed returns are the total amount that is due to you per month during retirement. It is the amount that you will unquestionably get in exchange for your premium payments.
Non-guaranteed returns are based on the insurer’s fund performance, and may not be guaranteed.
Naturally, your attention should be on the retirement plan's guaranteed income component. You can take the non-guaranteed income component with a grain of salt.
Depending on the retirement plan chosen, you can choose to receive payouts as soon as a year from the day you paid the premiums.
With certain annuity schemes, you may even decide when you wish to start receiving your retirement income.
Payout frequency refers to how often you can choose to receive your payouts.
You can normally arrange for your annuity income to be paid monthly, quarterly, half-yearly or annually.
Your choice affects how much annuity income you receive. Optimise your income stream according to your retirement lifestyle. Most plans give you the option to select the payout duration, for example, 10 years, 15 years, 20 years and above.
If lifelong income is your concern, consider a retirement plan that pays out for as long as you live. This reduces longevity risk, ensuring that you do not outlive your resources.
Since there are so many factors to consider, it would be smart to engage with a financial advisor to ensure that you get the retirement plan best suited for your profile
Do Payouts increase with Inflation?
Inflation does not retire when you do.
It’s best to have your payouts increase over time to combat inflation.
This feature is offered in certain retirement annuity plans.
For instance, an annual stepped-up income option is provided by AIA Platinum Retirement Elite.
You can select to get an annual stepped-up income from a range of 0% to 5% in order to guarantee that your standard of living in retirement is unaffected by growing inflation rates.
Retirement annuity plans in Singapore do provide insurance coverage.
It is important for you to be aware of your family's needs and personal health.
Some retirement plans provide coverage for Death, Total Permanent Disability, Critical Illnesses and even retrenchment.
This is an option if you desire to have a strategy to supplement your income and alleviate any possible financial stress on your family.
Also, it could be essential in instances where your family has a history of critical illness or you are working in a profession that puts you at risk of suffering a serious accident.
In certain plans, you may also add a premium waiver rider, which would stop you from paying your premiums in the event you contract a critical illness or suffer a permanent disability.
This means that the insurer will continue to make sure that the premiums for your retirement coverage are fully paid for as long as you are permanently disabled or critically ill.
In order to choose the right retirement plan, it is vital for you to analyze any existing insurance policies you may have and determine what is covered.
The premium payment for your plan is based on the retirement income you expect to receive.
If you’re unsure about how much retirement income you’ll need to retire comfortably, you could consult a financial advisor to work out all that for you.
From there, the financial advisor could recommend a plan with premium amounts based on your retirement income.
The higher the retirement income, the higher the premiums.
Depending on the retirement plan, you are also able to choose your premium term. This means you get to pick the duration over which you have to pay premiums.
Some plans allow for a single premium payment, which means you pay a huge lump sum once and wait for the policy to mature to yield its benefits.
While other plans require you to pay over a 5-10 year premium term time frame where you pay in instalments.
In cases of emergency where you’re tight on cash, some plans also allow you to initiate a premium freeze, where you stop paying premiums while your policy stays in force.
Premium payment options
Most retirement plans in Singapore may be paid with money from the Supplementary Retirement Scheme (SRS).
However, they may come with certain conditions. For instance, you may only pay via SRS if you agree to a single premium plan.
If you have been loading up your SRS account to receive tax benefits or engage in investments, this particular plan could be a good way to use your remaining money.
Why You Do Not Need A Retirement Annuity Plan
If you lack the funds to pay for one or prefer liquidity, you might not need a retirement annuity plan.
Compared to fixed deposits and unit trusts, annuities have a higher cost.
Many are sold via agents, and you are required to pay commission fees that incur when you purchase a retirement plan.
These commission fees can be quite substantial and are typically greater than 2 per cent.
Additionally, if you add additional riders to your insurance to increase your coverage, you will pay more.
Since these fees can be significant, it might be challenging to cancel a policy once you have signed.
Retirement Annuities Vs Investing
A buy-and-hold investment strategy should be a part of your retirement plan since it could produce better returns than a retirement plan.
But there are no guarantees when investing, which is a problem.
When stock markets fall, your hard-earned money is affected, and there will probably be more collapses in the future.
You must have the stamina to hold onto your assets until they start to recover.
Even then, investing in equities nearing retirement is an extremely risky move. It’s important to calculate your risk profile before deciding on whether you can afford to invest in risky products like stocks or ETFs.
As such, it’s recommended you diversify your risks by incorporating other instruments as part of your retirement strategy, such as retirement plans.
Retirement Annuities Vs CPF Life
The comparison between retirement annuities and CPF LIFE is detailed in the table above.
CPF is essentially risk-free as well. However, the earliest pay-out date is at age 65, and the maximum retirement income per month is around $2,120 to $2,280.
A private annuity plan is small in comparison to CPF LIFE in terms of guaranteed returns.
However, if you combine the two, an annuity can fill in the holes of the latter simply because it makes retirement more flexible.
Think about having a private annuity plan that provides lifelong payments of $1,000 per month beginning at age 55 in addition to your CPF LIFE. According to this, you might start semi-retiring at age 55.
Additionally, after you turn 65, you start getting $2,000 in CPF LIFE payments. If you combine it with your annuity income, you will be paid a salary of $3,000 each month for the rest of the payout period.
Furthermore, if you have a pension or private annuity plan which provides the same or higher monthly payouts for life, you can apply to be exempted from setting aside the retirement sum and withdraw all your CPF retirement savings.
To increase your monthly retirement income, retirement annuity plans are a good solution. It will partially reimburse you for your investment when you retire.
If you pick one with a capital guarantee, you will get a complete return. The bit that is not assured will provide you more, which is the cherry on top.