The Differences Between CPF Life & Typical Annuities

Figures have indicated that by 2030, nearly one million people here will be above the age of 60.

An often overlooked aspect of financial planning is retirement. The truth is with retirement planning what is essentially needed is actually MORE time than money. Retirement planning should be started within the first few years of working life. The earlier you start, the more adequately prepared you are for retirement.

The problem is most people are treating retirement planning as an afterthought. Retirement planning in your in your 30s is a far better option than retirement planning in your 50s.

With our average life expectancy in Singapore of 82 years old, there is also the issue of outliving your retirement savings.

The Singapore government has started to recognize this fact with the introduction of CPF Life.

What Is CPF Life?

The CPF Lifelong Income For The Elderly (CPF LIFE) is an annuity scheme that provides you with a monthly payout for as long as you live. Your retirement sum will be used to pay the premiums for CPF LIFE. All CPF members will be automatically opted in this program.

At age 55, CPF OA (Ordinary Account) will join CPF SA (Special Account) to become the CPF RA (Retirement Account).

The 2 main figures you need to know is:
1) Basic Retirement Sum (BRS) if you own a house (At 2017 – $83K)
2) Full Retirement Sum (FRS) if you don’t own a house (At 2017 – $166k)

Both minimum amounts will increase by about 3{260c08e698fa3fee1203f2f74c397965749e4e3870d80e92ad28191ffda38ea4} every year to account for inflation.

(You can do your own guess-timate on your own retirement sum when you turn 55)

These are the amounts that CPF will lock until you turn 65. Excess amounts on top of the 83k or 166k will be allowed to withdrawal at 55.

From age 65 onwards, the $83k or $166k will be paid out to you as monthly payouts until you pass away.

The monthly payouts you get will be determined from the amount in your Retirement Account savings.

Below is the table for estimated payouts you will receive:

[alert-warning]Due to inflation, the Full Retirement Sum is destined to increase, regardless you like it or not.[/alert-warning]

There is a provision in the law governing the CPF Life Plans which states that payouts are contingent on the plans being solvent. This is because premiums that are paid in to get the annuities are pooled and collectively invested.

Basically this means there is no guarantee on payouts.  The provision allows CPF Board to stop payments in the event that the CPF LIFE Fund becomes insolvent.

This is on par with the government’s view on being self-reliant and self-provision.

You should also take note that the CPF Life payout can also change and is not fixed.

Escalating CPF LIFE Payout

The Escalating CPF LIFE scheme was rolled out to address concerns about rising living costs and to take into account of inflation.

By opting for this option, you start your monthly CPF Life payout from a lower amount. This payout would then increase by about 2{260c08e698fa3fee1203f2f74c397965749e4e3870d80e92ad28191ffda38ea4} each year. This is in contrast to the current plans that provide a relatively fixed monthly payout for life.

This was only introduced recently and more details have yet to be released.

More information here:

http://www.straitstimes.com/politics/cpf-life-escalating-plan-available-from-next-january

https://services.mom.gov.sg/cpfpanel/

https://www.facebook.com/notes/cpf-board/8-things-you-should-know-about-cpf-life/10154757538385177/

Commercial Annuities Offered by Insurance Companies

An annuity is not an investment product. Essentially it is a type of insurance that supports you in the event you live a long life. (Current average life expectancy in Singapore is 82 years old)

The simplest form of annuity pays you a fixed monthly income for life, in return for a lump sum premium payment to the provider.

The payout rate – the percentage of your premium paid to you annually – will depend chiefly on life expectancy statistics and the returns available from the bond market. If life expectancies rise, or bond yields fall, then annuity rates fall too.

For a basic annuity, no further payouts are made when you die. That means if you pass away in early retirement, then your annuity has destroyed capital (i.e. nothing is left to pass on to the next generation).

However, if you live a long time, your annuity can be very good value – ensuring an income well beyond what your retirement pot could have provided if kept as cash.

You can view various annuity plans here:
https://www.diyinsurance.com.sg/portal/compare/?purpose=Retirement+Income

Annuities With Increasing Payout

There are 2 annuity plans in Singapore that adjusts to inflation which is:

• AXA Retire Happy (Inflated)
• Aviva MyRetirement Plus

However it is not a true annuity in the sense that the payouts are only for 20 years (and not for life).

What Happens If Insurance Companies Fail in Singapore?

CPF Life is governed by statuettes and the laws of Singapore.

For insurance companies, consumers can turn to the Policy Owners’ Protection (PPF) Scheme, administered by the Singapore Deposit Insurance Corporation (SDIC), automatically protects policy owners in the event a life or general insurer, which is a PPF Scheme member, fails.

All insurers registered by the Monetary Authority of Singapore (MAS) to carry on direct life business (other than captive insurers) or direct general business (other than captive insurers or specialist insurers) are required by law to be members of the PPF Scheme.

For life insurance, there is 100{260c08e698fa3fee1203f2f74c397965749e4e3870d80e92ad28191ffda38ea4} protection for the guaranteed benefits of the policy subject to caps, for example on the amount of sum assured and surrender value. More information can be found at the SDIC website.

Conclusion

There is no “ideal” annuity plan. Retirement planning is something you have to plan for actively and not let it slip by you.

It’s really important to become comfortable with the fact that nobody is coming to save you.

The annuity payouts are as close as passive income you can get during retirement. But to get the ideal retirement income level is a whole new story altogether.

You might need to figure out how to save more and EARN more so that your retirement plans can actually come true.

More Resources:

From Are You Ready.SG – 7 Things You Need To Know About CPF Life

CPF Life FAQ: https://www.cpf.gov.sg/members/faq/schemes/retirement/cpf-life