While people buy insurance because they fear they will die too soon, people buy annuities because they fear they will live too long…

While people buy insurance because they fear they will die too soon, people buy annuities because they fear they will live too long.

An annuity product provides a regular income to you.

An “annuity certain” provides a regular income to you for a certain period.

A life annuity provides a regular income to you as long as you are living.

You can buy an annuity by a lump sum (usually) or by instalments.

You can also choose to get payments immediately (called immediate annuity) or get payments later (deferred annuity).

Since January 1, 2013, CPF Members on reaching age 55 (for those born in 1958 or thereafter) will be placed on the CPF Life Scheme (an annuity) which replaces the CPF Minimum Sum Scheme. The CPF Life Scheme provides a monthly payout starting from the member's Drawdown Age (DDA) for as long as the annuitant lives. In contrast, the payouts from the CPF Minimum Sum Scheme will last for about 20 years.

However, for those born before 1958 are not placed in the CPF Life Scheme. There is an option to join the CPF Life Scheme anytime between age 55 and one month before his/her 80th birthday.

There are 2 CPF Life Schemes available, the Life Standard Plan or the Life Basic Plan. Both plans provide a different combination of trade-offs between the amount of monthly payouts and the bequest left for beneficiaries. The Life Standard Plan provides for higher monthly payouts but lower bequests for beneficiaries whereas the Life Basic Plan is just the opposite, providing for lower monthly payouts but higher bequest left for beneficiaries.

From January 2016, members will only need to choose their CPF LIFE plans at the point when they wish to start payouts from CPF LIFE, instead of making the choice at 55. Members will also have the option of deferring their payout start age up to 70 to enjoy higher payouts. For every year deferred, they can receive a permanently higher monthly CPF LIFE payout of about 6-7%.

Financial Planning Viewpoint

From the financial planning viewpoint, an annuity is a useful retirement planning product which will ensure that you will not outlive your money, i.e. there will always be money as long as you live!

There are two factors involved in deciding whether you want an annuity – the interest rate used by the insurer and your life expectancy.

You should also note the difference between fixed annuities where the payment amount is fixed at the point of purchase. An insurer may pay an extra variable payment depending on their investment performance.

But this is to be differentiated from “variable annuities” where the payments depend on the performance of the investments.

For more information on the above products and any other financial planning services, please feel free to leave us your contact details and we will get back to you.

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