FAQ: Life Annuity

1. What is a life annuity?

A life annuity allows you to invest a capital sum to earn an attractive monthly income payable for the rest of your lifetime. It is better than putting the capital sum in a bank to earn interest. If you put the capital sum in a bank, you can earn interest at 2% to 3% per annum. For example, a capital sum of $100,000 can earn for you $3,000 a year, or $250 a month.

If this capital sum is invested in a life annuity, you can earn a higher return, e.g. 5% to 6% per annum. A capital sum of $100,000, you can earn for you (say) $6,000 a year, or $500 a month. The actual amount depends on your age, gender and the type of annuity. A life annuity can pay a better return to you, because your capital sum is distributed back to you based on your average life expectancy.

2. Who should invest in a life annuity?

Every retired person should invest a capital sum in a life annuity to provide a guaranteed income that can meet the monthly expenses.

Most couples with a fully paid home will find $1,500 a month to be adequate for their needs, if they maintain a modest lifestlye. A single person will probably need $1,000 a month.

If the retiree wish to have a comfortable or luxurious lifestyle, a higher monthly income will be needed. Some people target to have $5,000 or $10,000 a month for their needs.

3. How is the annuity better than other types of investments?

The life annuity has the following advantages compared to other types of investments:

* it provides a higher return, compared to fixed deposit
* the payment is guaranteed for a lifetime

You can choose an annuity with the following features:

• pays back the balance of the capital on early death
• increases the monthly payment with a bonus yearly
  

If you put your capital sum in fixed deposit and spend more than the interest earned each year, you capital sum will run out at a future date. You will have nothing to live on.  With a life annuity, this will never happen. The monthly income will continue to be paid to you for as long as you live. It will grow with a yearly bonus.

4. How much do I get from my capital sum?

The amount of monthly income depends on the following:

• your current age and gender
• the commencement date of the annuity payment
• the type of annuity

Here is an example of the monthly annuity for a capital sum of $100,000. The first payment is due one month after the date of entry. A bonus may be added to the monthly payment each year, depending on the average investment yield of the fund.

With-CP: with capital protection, i.e. refund of balance of capital sum on early death
*No-CP: no capital protection, i.e. no refund on early death

A female receives a lower monthly payment compared to a male, because they are expected to live longer. An older person receives a higher monthly payment, because they have a shorter life expectancy. An annuity without capital protection pays more than an annuity with capital protection.

5. How does the bonus work?

Each year, the actuary works on the return on the investments of the fund. If this return exceeds the interest rate that is used to calculate the annuity payment, the actuary decides on the amount of the excess investment return to be used to declare a bonus to be added to the annuity payment. The actuary has to take many relevant factors into account. He has to act impartially and fairly in recommending the rate of bonus. The rate or bonus may differ between different types and series of annuity contacts.

If the rate of bonus is 3% and the monthly payment is $1,000, the bonus will add $30 to the monthly payment.
The bonus declared in each year is guaranteed and will be payable for all future years. The monthly payment can only increase with bonus. It can never be reduced. In some years, if the investment return is low, the actuary may recommend that no bonus will be added for the year.

6. Why is my capital consumed during my lifetime?

If you wish to keep your capital sum intact, you should keep your money in a bank and spend only the interest earned. However, the amount of interest may be quite low, and inadequate for your needs. You invest in a life annuity to earn a higher return. This is achieved by consuming your capital sum over the average life expectancy.

Some annuitants die younger. They will leave behind the balance of their capital sum in the fund. This will be used to pay the monthly income to the annuitants who live longer. The annuity works on the principle of pooling of risk of life expectancy. This is a fair arrangement.

Under the capital protected annuity, the balance of the capital sum (after deducting the monthly payments) is refunded to the estate on the early death of the annuitant. Only the interest earned is left behind in the fund.

7. What happens if the annuitant dies at a younger age?

It depends on whether the annuity has any capital protection, and the type of protection that is available in the policy.  In some cases, the annuity payment will continue to be paid to the beneficiary for a certain number of years. The remaining payments can be discounted to a lump sum, using the prevailing rate of interest. In other cases, the balance of the capital sum is refunded, after deducting the annuity payments that have been received.

8. What happens if the annuitant lives for a long time?

The monthly payments will continue to be paid for as long as the annuitant lives live. If the annuitant lives longer, the annuitant will receive more than the invested capital sum and the interest that is earned. The extended payment is contributed by the annuitants who die younger and leave behind a part of their capital sum in the fund.

9. Can I invest with my CPF savings?

If you have withdrawn your CPF savings, you are free to invest the savings in any suitable way that you decide. It is better to seek the advice of an insurance adviser. The CPF requires all members to keep a certain amount of savings in the retirement account. This amount is currently $94,600. This savings can be invested in a life annuity, but is subject to certain rules imposed by the CPF. Under this rule, the monthly payment can only start from age 62.

10. Can I invest with my own cash?

You can invest your own cash, including the savings withdrawn from the CPF account at age 55, in our life annuity. Most people choose an annuity policy that pays the monthly income immediately, and has a capital protection. A few annuitants prefer the non-protected policy, which pays a higher monthly income. Some people choose to invest their savings in our Combined Fund to earn a higher rate of return (not guaranteed), and to
convert a part of the savings into a life annuity when they are older, say after age 65.

11. What is the difference between a participating and a non-participating annuity?

A non-participating annuity pays a fixed monthly sum. It is not eligible for any bonus. A participating annuity pays a lower monthly sum (compared to a non-participating annuity), but is eligible for an annual bonus, based on the rate declared by the board of directors.

12. Can I cancel my life annuity to get a refund?

After the annuity payment has commenced, you are generally not allowed to cancel your annuity and get a refund. The annuity is intended to be a lifetime contract. If you insist on canceling the contract, we can pay the refund that is applicable in the event of early death. This refund is usually not attractive to the annuitant.

Under certain circumstances, we may pay a higher refund, but this is entirely at our discretion. We have to make sure that the request for cancellation is not an attempt to take unfair advantage of the fund.

13. Should I keep my capital sum to pass to my children?

You have other assets, including your property that can be passed to your children. This is more than sufficient. You should invest a certain capital sum in a life annuity for your own benefit. You have to take care of yourself. This capital sum does not need to be kept for your children.