Is long term endowment plan return better than CPF?

Hi anon,

The short answer is no. CPF guarantees 2.5% p.a. at a minimum by legislation and unless that changes (very unlikely), 2.5% risk free is extremely hard to get. For SA/MA/RA monies, it's 4% p.a., reviewed regularly and thus this might get trimmed in future (although unlikely). I have personally only seen two retirement income plans in my life that have guaranteed returns higher than 2.5% p.a. (I have one myself), and both are off market already.

However, when you talk about projected returns, then a long term endowment plan has the potential to beat CPF. The participating funds of most insurers do trend towards 4+% - 5+% in terms of returns and if the tenure of the plan is long enough, the nett return to the policy holder can exceed 4%. So the best thing you can hope for is a guaranteed return from a policy that beats 2.5%, and a projected return that beats 4%.

Having said that, CPF is constrained by an annual limit. For most people, their CPF will be their foundation for retirement in the long run. Only if it is apparent that the FRS is easily met, then spare monies can be considered to be deployed into a endowment or retirement income plan to grow the monies safely.

To begin with, it depends on the factor for comparison, e.g. returns, risk, liquidity.

Returns:

If you compare the guaranteed returns only, it is difficult if not impossible for most endowment plans to beat the returns from CPF. At this point, this is a fair comparison since CPF provides us with guaranteed returns. On the other hand, the premiums for your endowment policy is invested into the insurer's participating fund. In effect, you get a mixture of both guaranteed and non-guaranteed returns. You may find more information about it here: What is a Participating Fund Singapore

Next, if you compare the total returns (i.e. guaranteed + non-guaranteed) from the endowment plan, then there is a chance for an endowment plan to have potentially higher return than CPF. Otherwise, there is probably no point to take on the risk for lesser returns.

Risk:

As a matter of fact, CPF is probably one of the safest asset that you can own. This is because of the strong backing in the CPF system.

In contrast, any insurer will likely have higher risk, e.g. company-specific risk, investment risk.

Liquidity:

Thereafter, we look into liquidity. Depending on your current age, CPF may have a longer lock-in period for you. This is together with limited options on the situations when you can withdraw the money for use.

By comparison, you can withdraw any coupon or bonuses (if any) from your participating policy. Moreoever, you can also take on a policy loan to get higher cash value to tide over an emergency.

More Details:

• Reversionary Bonus and Terminal Bonus Singapore

• Insurance Policy Loan Singapore: How does it work

At this time, I have listed three factors for comparison between an endowment policy and CPF. Obviously, this list is not exhaustive and there are still other factors for consideration, e.g. which tool is better at fulfiling your needs. Therefore, I will suggest you to research further and I hope you will find the answer that you need.

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