There are many insurance plans in Singapore for many different purposes. In an over-simplified manner, we can categorised them under Life Insurance, General Insurance, Saving Plans and Investment-Linked Plans. (In descending order of importance and usefulness.)
We are going to touch on the topic of Retirement insurance, aka annuity plans in Singapore.
We will discuss why it does not make sense for the majority of Singaporean to buy retirement insurance. The answer lies in “CPF Life”.
What is Annuity?
The short answer to the question is, it is an insurance that you buy in return for a regular payout after a certain age.
For most annuity in Singapore, you pay a certain amount of premium for a fixed number of years, and by a certain age, maybe 55 or 60 or 65, you will receive regular payouts for a certain number of years.
This website helpfully compares the 3 best retirement plans in Singapore for 2018 and the winner goes to Manulife, NTUC and Aviva.
What is CPF Life?
CPF Life is a retirement scheme by CPF for CPF members.
CPF members are automatically included in CPF Life if they have at least $60k in their Retirement Account (RA) and if they are born after 1958.
If you don’t have $60k in your Retirement Account (RA), you can still select to join CPF Life.
At age 65, CPF members can apply to start receiving their payout for life.
Similar to retirement insurance, CPF members can choose the age to start receiving their payout.
Similar to retirement insurance, CPF members can choose the amount that they want to receive, CPF Life has 3 plans to choose from. Click here to find out the amount that you will get from CPF Life.
Why does it not makes sense to buy Annuity?
If CPF Life sounds like an annuity, it is because CPF Life is an annuity.
CPF is a mandatory retirement scheme, whether you like it or not, 20% of your salary is deducted into CPF. Your employer will top up another 17%.
It is actually a matter of personal finance management in which it doesn’t makes sense to buy annuity.
With the mandatory 20% CPF deduction, we are already buying an annuity.
If we already have one annuity policy, why gain another liability strained our finances further by buying another one?
Many feel the heart-pain of bringing in 20% lesser cash home on pay day and duly complains about it.
However, I have never heard anyone saying “I LOVE CPF!!! PLEASE DEDUCT 40% OF MY SALARY!!! PLEASE DEDUCT 50% OF MY SALARY INSTEAD!!!”.
Buying an extra annuity is exactly that. Many would question why a friend needs a second mobile phone when he/she already has one.
However, many would also buy an extra annuity when they already have one.
Further advantage of CPF
Here we further discuss the advantages of CPF Life over annuity. Which makes it all the more senseless to buy one
In the previous article, we spoke about the 2 biggest advantage CPF members has to beat the Minimum Sum, Good Interest and Compounding. It is still this 2 reasons why CPF Life triumph Annuity easily.
For interest, CPF provides 4% to 5% in Special Account, which is meant for retirement. Annuity returns hardly even come close to what CPF is giving.
In order for the interest to show superior results, CPF members have the day they start working until age 55 to compound, assuming you start working in your 20s, provides a good 30 years for compounding to do magic for you.
The magic of compounding (click on this link to see the magic) is more significant at the later stage.
Annuity are not cheap. People in their early career simply cannot afford it. That’s why they are usually recommended to consumers who have worked for some time. Although it is still expensive.
One of the frequently-used selling point is that with CPF, your payout starts at 65, for annuity, consumers can start at 55.
By doing so, the compounding effect is greatly reduced. Besides, many are forgetting that one can withdraw excess cash from CPF at 55. And with compounding done right, that will be interest the government pays you, instead of your money.
When you stop working due to retrenchment or illness, you simply stop contributing to CPF. No additional cost on your side.
With an annuity, you have to continue to pay. Yes, there are riders to waive off premium for exactly that sort of situation.
But what!?! Pay more so that you don’t have to pay? Makes sense? That’s really pay-and-pay. (PAP. Pun intended.)
- Lifetime Payout
CPF Life pays for life. Annuity insurance pays for a specific period of time.
CPF is mandatory. Buying annuity is a choice. Annuity insurance are usually too expensive for your own good. Do not leave your finances in the hands of other people.
Draining your cash when you already have one. To us at ITP, CPF Life is a no-brainer over annuity. You pay less to get more with more flexibility and gets paid longer.
Nonetheless, CPF Life will always be one cornerstone of our retirement plans.
No matter how good CPF Life is, it will never make up the full bundle of our retirement plan. CPF Life is a good umbrella to fall back on should anything goes wrong.
Besides, life is not only about working towards retirement and life after retirement. Life consists of the time before retirement as well. At ITP, we pursue a sustainable path of generating returns before retirement and beyond retirement.
Not only can we get sustainable dividends, we are also able to compound our personal bank accounts and net-worth with their help of growth stocks, options and so on.
That, however, is another long story. I suggest you click here to find out instead.