facebookIs it wise to use lifelong private annuity as an alternative to CPF Life so as to exit CPF Life? - Seedly


Zen Rogue Xuan

Zen Rogue Xuan

16 Jan 2020



Is it wise to use lifelong private annuity as an alternative to CPF Life so as to exit CPF Life?

CPF website says "If you are receiving lifelong monthly pension or payouts from your life annuity bought using cash, you may be fully exempted from setting aside the Full Retirement Sum in your Retirement Account and need not join CPF LIFE." Ideally a single premium product that can be bought using SRS funds

Discussion (17)

What are your thoughts?

Returns wise CPF life wins on scale of pooled risk, private companies vs a nation. For private annuities, also ask if you need the "insurance" components of such products as well. The advisor missed the time value of money concept (Future value vs present value) and provided incorrect calculations (the 21k in 15years would cost than 316k after earning interest on those amounts) . On SRS funds.

Does your SRS have a large sum such that you would incur high taxes on annual withdrawals? As such considering to get an annuity using SRS to reduce this taxable amount, as well as clock for retirement amount, abiet the lesser potential return from private annuty plans? If so, the calculations and trade off will be very different.

The 3 CPF life schemes are quite linear (Put more get more, put less get less).

Are you planning to use SRS to buy the private anuity first and top up the remainder using CPF Life, then the question depends on what income range at retirement you are targeting.

Buying private Ins does diversify your sources of income other than CPF life.

As others mentioned, bequest is another feature for another discussion

revised answer in consideration of the comments below, and I don't believe continuing the discussion is beneficial

I think most insurers have said it was very difficult (if not impossible) to beat risk free 4%. Initially I thought this was a well meaning question, but the more I thought about the exchange, I believe this was a loaded question, because a) it started out as comparing private annuity to cpf life, and b) ended up bashing cpf life for not leaving a bequest at the later stage of life.

its like evaluating a guide dog on its ability to lay eggs, when you got it to lead you because you cant see anymore

But end of day its your money. If you believe the private annuity to do better than cpf life, then go for it. If you believe the bequest is more important than the monthly payments to sustain your lifestyle through those old age days. If you believe guaranteed 4% is worse than guaranteed 2+% with non-guaranteed returns.

When the best way to compare is the amount of money you put in, vs the money you took out over the full term of the policy, and not just entirely based on the last remaining bequest.

Consider these questions when considering the private annuity
1) what is the cost / annual premiums required to achieve the same level payout as cpf life?
2) can you afford that premium?
3) how likely do you feel that the insurer may go bankrupt vs cpf board?
4) what is the rate of return they put in the policy?
5) what is exactly guaranteed in the terms and conditions of the policy?

My first thoughts, most insurers cannot guaranteed they will beat 4% annual return. If you remember the 2008 financial crisis, there were a number of insurers that needed to be bailed out by US govt. And I doubt the t&c will write down that the company guarantees better than 4%.

Further points to highlight on reading example of Aviva MyLife plan which is listed in comments

  • note the fine print and what is guaranteed. For example guaranteed increase in surrender value of only 0.25% (from 5th yr onwards), and the capital guarantee is only on the nominal sum of premiums paid (ie the returns or interest equivalent on your premiums does not form part of capital guarantee - 4% compounding interest over a 20 year term is probably quite a big deal to miss out on)

  • guaranteed return is only 2.2% on brochure but the projected returns of 3+% and 4+% are often used to illustrate bonus / non-guaranteed returns. Take note that it is an illustration and you could get something worse or better than that. (i will believe it tends to be worse in reality)

  • when you have the benefits and payout schedule in front of you, take note there should be an insurance / admin cost column next to your age and premiums paid column. The insurance cost is usually high and could be a substantial amount of the first two years premium. Do a calculation of how much that is compounded at 4% over 20 years.

  • when evaluating your investment return, from a valuation point of view, it would be better to exclude the terminal bonus which you will not get on surrender, but could form part of the bequest.

Humble opinion - I think private annuities are worth exploring, but I definitely do not see them as a direct subsitute for CPF life. They could be complementary / add-on supplements based on individual preference. One key objective of CPF life is to provide life long payments, which may or may not be enough for own needs, but at least its there. Once you live beyond 70, odds are inflation will eat into the real purchasing power of the payout, and minimizing your burden on loved ones might be a higher priority than leaving a bequest, especially for those who did not have a good start in life.

Do conduct a through and detailed evaluation / comparison to get a feel of the minimum guaranteed, the middle ground (assuming low rate of return), and the upside (which could be all airy fairy and never happen at all).

Would your decision change if you ignore the illustrated returns tables, and consider only the minimum guaranteed or maybe minimum +1%?

I dont know about you, but I had enough of the two %s often used to illustrate the returns, because more than half the time I encounter, the policies I had terminated failed to repeatedly meet either of them.

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Hariz Arthur Maloy

Hariz Arthur Maloy

27 Jun 2019

Independent Financial Advisor at Promiseland Independent

Any lifetime income annuity policy would suffice. I could show you a few if you'd like from multiple...

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