
Over the past year, we have seen many clients asking for annuities with a high return, comparing these returns to those from investments. However, with annuities meant to provide a solution for retirement planning, we feel that annuities are not suitable to be compared to investments. In this article, we explain how annuities work and who annuities will be suitable for.
What are annuities?
A type of life insurance, annuities are generally used for retirement planning with premiums paid for a specified period. Upon reaching your desired retirement age, pay-outs from your annuity will commence. Annuities allows individuals the option to receive a regular stream of income in retirement and are usually used to supplement CPF Life pay-outs and/or retirement savings.
(See "Am I Ready To Retire?")
How do annuities work?
Returns from annuities are made up of a guaranteed and non-guaranteed component with this amount differing between policies. While the non-guaranteed returns of annuities are typically illustrated at 3.25% and 4.75% investment return, it is important to note that these returns are not guaranteed. Instead, non-guaranteed returns are dependent on the performance of the insurer's participating fund with the actual returns declared by the insurer on a yearly basis.
Pay-outs from annuities |
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Guaranteed |
Non-guaranteed |
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Returns will differ between insurers and plans |
Illustrated at 3.25% and 4.75% with actual returns dependent on the performance of an insurer's participating fund |
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Designed as a solution for retirement planning, annuities are not meant to be compared with investments. Therefore, if you are looking to receive high returns per annum then annuities will not be suitable for you.
(See "Best Critical Illness Insurance Singapore 2020")
Annuities are suitable for...
#1 Financial certainty in retirement
Market volatility brings about uncertainty to your assets with present day assets likely to be valued differently 10 years later. With the value of your assets dependent on the performance of the market, this may result in some financial uncertainty. Income from annuities however, may not be subjected to market fluctuations.
Made up of guaranteed and non-guaranteed components, the guaranteed component of annuities are fixed and guaranteed. This means that you will be able to receive a guaranteed regular stream of income from your annuity. With knowledge that you will never run out of money and/or outlive your savings in retirement, this financial certainty thus allows you to enjoy your retirement without having to worry about your finances.
(See "Don't Make These 3 Mistakes With Your Home Insurance")
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#2 Low-risk option for retirement planning
With the Policy Owner's Protection Scheme (PPF Scheme) providing protection for annuities, this guarantees your benefits in the event of the failure of the insurer.1 While this is unlikely to occur, the PPF Scheme acts as a safety net for your annuity. This provides a peace of mind with protection for your guaranteed benefits given up to $100,000.
(See "Are Integrated Shield Plans Necessary?")
#3 To complement your CPF Life pay-outs and retirement savings
A type of annuity, CPF Life was designed to help Singaporeans plan for our retirement with the choice to start our CPF Life monthly pay-outs anytime between the age of 65 to 70.2 There are currently three types of CPF Life plans with Singaporeans most likely to opt for the default, standard plan.3
Types of CPF Life plans |
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Standard Plan (default) |
Escalating plan |
Basic plan |
Higher level monthly pay outs |
Pay outs start lower and increases by 2% every year |
Lower monthly pay outs |
To be eligible for the Basic Retirement Sum, individuals are required to have a minimum of $90,500 in their CPF accounts at age 55. Doing so will allow them to receive monthly pay outs of $750 to 810 a month.4
While this may be sufficient for some to lead a basic retirement lifestyle, those who wish to enjoy their retirement in greater comforts may want to consider alternatives such as private annuities. This could offer an alternative stream of income and complement any existing income from investments and/or retirement savings.
Do note that private annuities typically have a last entry age of 65. Therefore, annuities may not be suitable if you are older than age 65.
(See "I Already Have CPF Life, Do I Still Need Annuities?")
#4 Flexibility from private annuities
With CPF Life providing higher returns, you may wonder if it is worth topping up your Retirement Account so as to maximize CPF Life and receive higher pay outs. While topping up your Retirement Account will allow you to receive higher pay outs from CPF Life, do note that these top ups are irreversible and irrevocable.5 This would result in less flexibility as you would not be able to enjoy the liquidity that private annuities offer.
Additionally, pay outs from CPF Life will commence no earlier than the age of 65 and can only be deferred to the maximum of age 70. Therefore, should you wish for pay outs to commence at an earlier age, you may wish to consider private annuities.
(See "Best Personal Accident Insurance Singapore 2020")
Annuities are suitable for:
Annuities are not suitable for:
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1Source: https://www.sdic.org.sg/calc/pop_calc
3Source: https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/cpf-life
4Source: https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/cpf-life

