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An annuity: Would you rather have it or not? (UPDATED)

Sunday, February 15, 2015

I told a friend over a tau hui break just now that there are really many Singaporean families which seem to be doing very well but, in actual fact, are not doing well at all. 

In many instances, low or non-existent financial literacy is to be blamed.

Chances are that these people will be unprepared or under-prepared for retirement. 

Many actually do not believe in annuities, especially the one that is linked to the CPF. 

In fact, ironically, I have found that savvy investors are more likely to say that annuities have a place in their retirement portfolios while people who really need annuities more don't seem to trust them.

Anyway, if you do not believe in the CPF Life, no matter what people say, I understand if you want to skip the rest of the article but you might want to read this instead:

Have huge amount of savings and work till 70?

For the rest of us who believe in the CPF Life, we would be happy to know that there is an article in The Sunday Times today which compares the returns of the CPF Life against other annuities available in Singapore.

CPF Life is the best annuity there is in Singapore.

CPF members are a fortunate bunch even if many don't know this.

Source: The Sunday Times, 15 Feb 15.

There is also a very good article by Mok Fei Fei on the CPF which discussed:

1. Why it is wise to keep money in the CPF?

2. Know which plan you are eligible for.
(Remember the 3 little pigs and their huts? See Related Post 2.)

3. Check both returns and risks.
(Remember the Hong Lim Park protests? See Related Post 3.)

4. Decide how much you need.

5. Maybe complement CPF Life with private plans.


Central Provident Fund (CPF) members will be able to grow their retirement savings further next year as the Government will raise interest rates on account balances, the salary ceiling for contributions and contribution rates for older workers.

An additional 1 per cent interest will be applied to the first $30,000 of CPF savings for those aged 55 and above next year, on top of the existing 1 per cent extra interest on the first $60,000 of savings. This means that the first $30,000 in Special, Retirement or Medisave accounts can earn up to 6 per cent interest.

(Source: The Straits Times, 23 Feb 15.)

Related posts:
1. An annuity proposal: A case study.
2. Proposed changes to the CPF.
3. We do better managing our savings than the CPF does.


Komatineni said...

Nice summary from the article and can't agree more with the observation "people who really need annuities more don't seem to trust them". Unfortunately people who learn by observation tend to do better, while people who learn by experience may end up with disasters.

AK71 said...

Hi Komatineni,

The main reason why I have shared very personal information regarding my CPF-OA, SA and MA balances is to show how it is possible to make use of the system that is in place to help us meet our longer term needs in personal finance.

I certainly hope that less people would have to experience disasters in their personal finances especially if these disasters could be avoided in the first instance.

SMK said...

The figures on the "annuities" look like a rehash of cash back anticipated endowment plans featured on yours and kyith's website before. Just that they push the payout later.

Sanye ◎ 三页 said...


Do you know if the revised CPF rule allows members who are above 55 to top-up their retirement account to the Enhance Retirement Fund of 241K?

Anonymous said...

AK, as usual great article on CPF. thanks for sharing.

Am I right to say that pledging an amount that could exceed the enhanced retirement sum may not yield much benefits since the amount of payout is capped between 1.7 - 1.9 per month?

Serendib said...

Hi AK, I agree that the issue is that of trust... I notice that many, especially the older folk, are wary of CPF Life as they fear that the "goal-posts" will change like they did with Minimum Sum. I believe that the CPF Life payout is not guaranteed (which even the ST graphic does not mention). Perhaps what the govt should do is to guarantee the payout (or at least a certain amount of it).

AK71 said...


The annuities available from the private insurers? They don't look very attractive relative to what the CPF Life is able to offer, given current day realities.

They have relatively large non-guaranteed portions, similar to private endowment plans you mentioned.

So, you are right in your observation. :)

AK71 said...

Hi Sanye,

I believe that the projected numbers are based on decision made when CPF members turn 55.

I do not know if the option to top up to the ERS is available anytime between 55 to 65 years old.

I will wait for details on the changes and the mechanics to be firmed up. :)

AK71 said...

Hi incantations,

Similar to the cap on the SA, I do not think that we would be allowed to contribute an amount that would exceed the ERS. So, no worries. :)

AK71 said...

Hi Serendib,

Because funds in the CPF accounts are used to buy bonds issued by the government, the returns are highly predictable. Although not indicated in the papers, I believe that the payouts are guaranteed. :)

As for the the matter of trust or the lack of it, I can only hope that the system has matured with these latest changes and that there will not be any big changes in future. Over time, hopefully, Singaporeans will come to appreciate and trust the system. :)

Unknown said...

Hi AK i would like to have some opinions from you and your readers. I just started work recently after graduation. I have a study loan which costs me around $20k. However I am also keen to start investing and build a war chest soon.. Good thing about my loan is that it is interest free. I need to pay a fixed amount each month. Given my condition, would you

1. Pay the minimum fixed amount each month and have more $ saved each year or

2. pay more than what is required each month so that i will be debt free asap, but with less savings ?

Thanks in advance!

AK71 said...


An interest free study loan? You must have had Santa Claus as a lender! Lucky you! ;)

Well, it is a no brainer for me. If I had an interest free loan, I would take my time to pay it down. :)

Serendib said...

Hi AK,

"Although not indicated in the papers, I believe that the payouts are guaranteed. :)"

unfortunately that is not the case -see here:
Letter by Wilfred Ling and CPF response

Why not have guaranteed minimum payouts?
For the scheme to be sustainable over the long term, premiums and payouts must be adjusted periodically to reflect actual mortality experience and investment returns. As such, payouts are not guaranteed.{36D803DC-A584-4BA1-971D-A765F5A83F5E}&NRCACHEHINT=Guest#9

SMK said...

If I had an interest free loan whose legal documents are admissible in court, I would leverage up. But the cheapest study loans are CPF ie. 2.5%.

And if the interest free loan is from a family elder or relative, I wouldn't take advantage but pay it off soonest. Or work out a fair deal. 3% like OCBC?

AK71 said...

Hi Serendib,

Oh, I thought we were talking about guaranteed payouts but you are actually thinking about guaranteed minimum payouts. OK, I understand now. :)

This explains why the CPF Life payouts for the different RS are estimated ranges.

Serendib said...

Hi AK, sorry I was unclear.. I feel there should be a guaranteed minimum payout. Otherwise, even the payout ranges given for the different RS are "for illustration purposes only" - so if CPF wants to encourage more people to keep their sums with CPF at 55, they should guaranteed _some_ minimum payout. This amount could even be lower than the floor given in the ranges now.
As you stated, the returns to CPF should be quite predictable, so I'm sure they can guarantee _some_ minimum return to its members. That way members can also compare with other annuities in the market and decided for themselves

AK71 said...

Hi Serendib,

I would actually go one step further to say that the guaranteed minimum payout should be meaningful too.

I am sure it is not too demanding given the understanding that the interest payments in our CPF accounts are highly predictable.

Nick said...

The Department of Statistics says that the average monthly household expenditure per household member in 10 years for following percentile are:

1. 21st to 40th expenditure quintile will be about S$657. (lower income group)

2. 61st to 80th expenditure quintile, it will be about S$1,338. (higher income group)

This is a good guide for what you will need for a basic retirement.

Compare this to CPF life payout for the following categories:

1. Basic Retirement Sum of $80,500 received monthly payment of $650 - $700

2. Full Retirement Sum of $161,000 monthly payment of $1,200 - $1,300

3. Enhanced Retirement Sum of $241,000 monthly payment of $1,750 -$1,900

This is not too far off from the department of statistics average monthly household expenditure per household member.

It was expected that among the cohort of CPF members turning 55 in 2020, 7 in 10 active members will accumulate enough CPF savings to meet the Basic Retirement Sum.

As announced in Budget 2015, it is now easier to reach these sums:

• Workers aged 50-55 will have their CPF contribution go up by 2%. Those aged 56-60 will have their contribution rise by 1% and workers aged 61-65 will have their contribution go up by 0.5%.

•CPF will pay an extra 1% per annum interest on the first S$30,000 of CPF balances from the age of 55.

For those who are able, taking a leaf out from AK, we can also top up our CPF and invest beyond CPF to give us additional income for an above basic lifestyle.

AK71 said...

Hi Nick,

Thanks very much for the detailed comment. Much appreciated. :)

Compared to investing in stocks, it is much easier to understand how the CPF works. Compound interest needs time to work. Start with a bigger base and the results will be even more impressive. :)

AK71 said...

From my FB wall:

Ronnie Wan:
"99% born after 1958 will be included in CPF Life (1 annuity). Can we use our surplus CPF funds or cash to buy additional annuity with CPF since their monthly payout is the highest as compared with private insurers?"

"There is always the ERS."

Ronnie Wan:
"BRS or FRS or ERS ... is only 1 annuity. Can we purchase additional with surplus funds via cash or CPF?"

"BRS, FRS or ERS, we are allowed only one CPF Life annuity per member... Many are trying to leave as little as possible in the RA which was why they came up with the BRS as an option. Unless we are financially challenged, I would opt for the ERS or at least the FRS. Old people should seek certainty in retirement income and not be too adventurous with money."

AK71 said...

To read about the BRS, FRS and ERS, go to:
Proposed changes to the CPF.

AK71 said...

Ben said...
You are right. We can't depend solely on CPF for retirement. There is an need to rely on other savings for worry-free retirement.

Blogger AK said...
Savings can be depleted. Unless we have plenty, it might not be a good solution.

For those who are willing to take on some risk, investing in some income generating assets is probably a good idea.

For those who are more risk averse, getting a private annuity plan to supplement CPF Life once we have the ability to hit ERS is probably a good solution.

Why retirement is not an option for some?

AK71 said...

Sau Yee Fong:
Agree. Annuities ensure certainty in cash flows in our golden years. Don't think that we can always pick the right dividend stock or REITs. Even dividend stalwarts like SPH, Singpost and SIA Engineering suffer from dividend cut in recent years.

AK71 said...

Kelvin Tan:
Once more people understand what is sequencing risks, they will understand the importance of annuities.

"Attempting to sustain a fixed living standard using distributions from a portfolio of volatile assets is an inefficient retirement income strategy. This is a unique source of sequence risk." Source: FORBES

AK71 said...

The report highlighted that with CPF's interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

"This compares favourably with life annuities in most markets," stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65.

It is no wonder that financial experts like Mr Christopher Tan, chief executive of Providend, believes that every retiree's portfolio must include an annuity plan to hedge against longevity risk.

He says: "CPF Life is currently the best annuity plan in the market. It is low-cost and offers high return."

AK71 said...

AK Tan says...
You can participate in CPF Life any time before 80 years old.
I wouldn't recommend it though.

AK says...
CPF Life pays out automatically from age 70. Unless we meet the requirements latest 6 months before the pay out date, we cannot participate in CPF Life.

If we believe that an annuity is a good retirement funding tool, then, the CPF Life is the best there is. If we don't believe in annuities, then, we won't believe in CPF Life.

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