Securing your future - A guide to Annuities

By Lynette Tan

If you’ve only got a minute:

• An annuity is a retirement income plan that pays out a steady stream of income payments either for a fixed period or for the rest of your life.
• You may consider an annuity to supplement your CPF LIFE payouts for your retirement.

As you approach retirement, the question of having a steady income stream becomes critical. How will you ensure a comfortable lifestyle without the regular pay check you've relied on for so long? This is where annuities come in, offering a financial option to secure your financial future and ease your transition into retirement.

An annuity is a type of insurance where you make a lump sum or regular premium payments in return for a steady stream of income payments, either for a fixed period or for the rest of your life.

The insurance company invests the premium payments money in a variety of assets like bonds, stocks, or real estate. The returns generated from these investments are used to fund your future income payments, providing you with a dependable source of income even after you stop working.

Types of annuities

It's essential to understand the different types of annuities available and how they compare to other retirement income plans.

Term Annuities: A term annuity provides guaranteed income payments for a specific period, rather than for life. Key features include

• Fixed period: You choose the duration of the term, which can range from a few years to decades.
• Guaranteed payments: During the chosen term, you receive regular income payments, usually monthly, at a fixed rate.
• No lifetime guarantee: The payments stop at the end of the term, even if you are still alive.

Life Annuities: A life annuity provides guaranteed income payments for the rest of your life. The key feature is for the insured to receive regular income payments, typically monthly, for as long as you live. This provides a lifelong stream of income, eliminating the risk of outliving your savings.

An example is the national annuity CPF LIFE scheme that provides a stable income stream during retirement for Singaporeans and Permanent Residents until end of life. However, CPF LIFE has limited flexibility in customisation compared to a private annuity plan.

How an annuity works

Annuities work by accumulating funds over time and then distributing those funds as regular payments. You begin by making contributions to the annuity, which can be a lump sum or a series of regular payments. These contributions are then invested in a variety of ways depending on your insurer. The growth potential of your annuity will depend on the investment strategy and performance of the underlying assets.

Annuities typically have 2 phases: accumulation and distribution. During the accumulation phase, you make contributions and watch your annuity grow. This phase can last for many years, allowing your money to compound and potentially reach a substantial amount.

The distribution phase begins when you start receiving regular payments from your annuity, which can be monthly, quarterly, or annually. This phase is designed to provide you with a reliable income stream during retirement.

An example of a retirement income plan is DBS RetireSavvy. You can customise your plan by choosing your preferred retirement age, adjusting your income payout period, and selecting your desired combination of lump sum payment and monthly income. This allows you to tailor the plan to meet your specific needs, giving you control over your retirement savings.

RetireSavvy offers affordable premiums starting from just S$128.74/month for a 10-year plan. You can also choose a single premium plan, 3-year, or 5-year plan. This allows you to select a plan that fits your budget and financial situation. The plan offers capital guarantee, ensuring you receive 100% of your capital when you reach your selected retirement age or the end of the 15th policy year, whichever comes first. In addition to your capital, you'll also receive guaranteed returns and potential non-guaranteed returns from the policy, helping you build your retirement savings.

Why consider an annuity for your retirement

While some Singaporeans may plan to rely solely on their CPF for their golden years, it is prudent to have more than one source of passive income for a more secure and comfortable retirement. Moreover, the monthly CPF LIFE payout may be inadequate to support the retirement lifestyle they desire.

An annuity can offer several advantages:

• Guaranteed income: Annuities are a beacon of stability in the unpredictable world of investments. Unlike stocks or bonds that can fluctuate in value, annuities provide guaranteed income payments, ensuring a consistent flow of cash flow throughout your retirement. This eliminates the worry of market volatility impacting your financial security.
• Protection from outliving your savings: The fear of outliving your savings is a real concern for many retirees. Annuities can help alleviate this worry by providing a guaranteed income stream for life, regardless of how long you live. This ensures you have a consistent source of income to cover your expenses, even if you live longer than anticipated.
• Tax benefits: Annuities received in Singapore are not taxable unless they are received from a partnership, Supplementary Retirement Scheme (SRS), or annuity policy bought by an employer in place of a pension or other employment benefits.
• Flexibility: The world of annuities offers a range of options to cater to different needs and payout period. For instance, some allows you to choose your retirement age, monthly or lumpsum payout and option to receive non-guaranteed bonuses.

Choosing the right annuity is a crucial decision that requires careful consideration. Factors to consider include:

• Retirement goals and needs: What lifestyle do you envision for retirement? What are your projected monthly expenses, including housing, healthcare, food, and other necessities?
• Risk tolerance: Are you comfortable with predictable income and prefer to minimise risk, or are you willing to accept higher risk for the potential for higher returns?
• Financial situation: How much do you need to supplement your retirement income? What are your existing savings, investments, and other retirement accounts such as CPF and SRS?
• Age and Health: Your age and health can influence the type of annuity that best suits your situation.
• Inflation: If the rising cost of living is a concern, consider having a few annuities to “ladder” your passive income flows over specific periods. Research has shown that the early and last stages of the retirement phase are usually marked by higher expenses.

While annuities offer several advantages, some potential drawbacks exist. They may offer lower returns compared to other investments, limit your access to funds before the payout period, and come with associated fees and expenses.

Alternatives to annuities include contributing to the SRS and investing in stocks, bonds, real estate, and endowment plans.

Ultimately, the decision to buy an annuity should be based on a careful assessment of your retirement goals, risk tolerance, and financial situation.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.