Wednesday, August 09, 2006

FAQ: Life Annuity

1. What is a life annuity?

A life annuity allows you to invest a capital sum to earn an income payable for the rest of your lifetime.

If you put the capital sum in a bank, you can earn interest at 2% to 3% per annum. For example, a capital sum of $100,000 can earn for you $3,000 a year, or $250 a month.

If this capital sum is invested in a life annuity, you can earn a higher return, e.g. 5% to 6% per annum. For example, a capital sum of $100,000, you can earn for you, say $6,000 a year, or $500 a month. The actual amount depends on your age, gender and the type of annuity.

A life annuity can pay a better return to you, because your capital sum is distributed back to you based on your average life expectancy.

2. Who should invest in a life annuity?

It is advisable for all retired persons to invest in a life annuity. You should invest a capital sum that is sufficient to provide a guaranteed income that can meet your expenses during your retirement.

Most couples with a modest lifestyle will find $1,500 a month to be adequate for their needs, if they already owned a home that is fully paid. A single person will probably need $1,000 a month.

If they are used to a comfortable or luxurious lifestyle, they will need a higher monthly income. Some people target to have $5,000 or $10,000 a month for their needs.

3. How is the annuity better than other types of investments?

The life annuity has the following advantages compared to other types of investments, such as fixed deposits or investing in shares:

* it provides a better return than fixed deposit
* the payment is guaranteed for a lifetime

You can choose an annuity with the following features:

* pays back the balance of the capital on early death
* increases the monthly payment with a bonus each year

If you put your capital sum in fixed deposit and spend more than the interest earned each year, you capital sum will run out at a future date. You will have nothing to live on.

With a life annuity, this will never happen. The monthly income will continue to be paid to you for as long as your live. It will continue to grow with a bonus.

4. How much do I get from my capital sum?

The amount of monthly income depends on the following:

* your current age and gender
* the commencement date of the annuity payment
* the type of annuity

Here is an example of the monthly annuity for a capital sum of $100,000. The first payment is due one month after the date of entry. A bonus may be added to the monthly payment each year, depending on the average investment yield of the fund.

Entry Gender Monthly annuity
Age No-CP With-CP

55 Male $549 $391
Female $521 $366
60 Male $587 $428
Female $556 $400
65 Male $629 $473
Female $599 $443

No-CP: no capital protection, ie no refund on early death
With-CP: with capital protection, ie refund of balance of capita sum on early death

A female receives a lower monthly payment compared to a male, because they are expected to live longer.

An older person receives a higher monthly payment, because they have a shorter life expectancy.

An annuity without capital protection pays 35% to 40% more than an annuity with capital protection. The difference is quite high!

5. How does the bonus work?

Each year, the actuary works on the return on the investments of the fund. If thi s return exceed the interest rate that is used to calculate the annuity payment, the actuary decides on the amount of the excess investment return to be used to declare a bonus to be added to the annuity payment.

In deciding on the amount of the bonus, the actuary has to take many relevant factors into account. The actuary has to act impartially and fairly in recommending the rate of bonus. The rate or bonus may differ between different types and series of annuity contacts.

If the rate of bonus is 3% and the monthly payment is $1,000, the bonus will add $30 to the monthly payment. The bonus declared in each year is guaranteed and will be payable for all future years. The monthly payment can only increase with bonus. It can never be reduced.

In some years, if the investment return is low, the actuary may recommend that no bonus will be added for the year.

The recommendation of the actuary is subject to approval of the board of directors. The payment of the bonus is non-contractual and is not guaranteed. The decision of the board of directors is final.

NTUC Income is a cooperative society. The actuary and board of directors will act in the best interest of all annuitants in deciding on the amount of bonus to be declared. They will declare a good rate of bonus while ensuring that the annuity fund remains financially solvent for all future years.

6. Why is my capital consumed during my lifetime?

If you wish to keep your capital sum intact, you should keep your money in a bank and spend only the interest earned. However, the amount of interest may be quite low, and inadequate for your needs.

You invest in a life annuity to earn a higher return. This is achieved by consuming your capital sum over the average life expectancy.

Some annuitants die younger. They will leave behind the balance of their capital sum in the fund. This will be used to pay the monthly income to the annuitants who live longer. The annuity works on the principle of pooling of risk of life expectancy. This is a fair arrangement.

Under the capital protected annuity, the balance of the capital sum (after deducting the monthly payments) is refunded to the estate on the early death of the annuitant. Only the interest earned is left behind in the fund.

If the annuitant does not need to have the refund on early death, they will receive a larger monthly payment.

7. What happens if I die at a younger age?

It depends on whether you have any capital protection, and the type of protection that is available in your annuity policy.

In some of our earlier policies, the annuity payment will continue to be paid to the beneficiary for a certain number of years. The remaining payments can be discounted to a lump sum, using the prevailing rate of interest.

For the policies issued in recent years, the balance of the capital sum is refunded, after deducting the annuity payments that have been received! .

8. What happens if I live for a long time?

The monthly payments will continue to be paid to you for as long as you live. If you live longer, you will receive more than the invested capital sum and the interest that is earned. The extended payment is contributed by the annuitants who die younger and leave behind a part of their capital sum in the fund.

9. Can I invest with my CPF savings?

If you have withdrawn your CPF savings, you are free to invest the savings in any suitable way that you decide. It is better to seek the advice of an expert adviser.

The CPF requires all members to keep a certain amount of savings in the retirement account. This amount is currently $99,400. This savings can be invested in a life annuity, but is subject to certain rules imposed by the CPF. Under this rule, the monthly payment can only start from age 62.

NTUC Income has a special plan, called the Classic Annuity, that is approved by the CPF. This plan is very popular. Over 25,000 CPF members have opted to invest their retirement account in this plan.

10. Can I invest with my own cash?

You can invest your own cash, including the savings withdrawn from the CPF account at age 55, in our life annuity.

Most people choose an annuity policy that pays the monthly payment immediately! , and has a capital protection. A few annuitants prefer the non-protec ted policy, as it pays a higher monthly sum.

Some people choose to invest their savings in our Combined Fund to earn a higher rate of return (not guaranteed), and to convert a part of the savings into a life annuity when they are older, say after age 65.

11. What is the difference between a participating and a non-participating annuity?

A non-participating annuity pays a fixed monthly sum. It is not eligible for any bonus.

A participating annuity pays a lower monthly sum (compared to a non-participating annuity), but is eligible for an annual bonus, based on the rate dec! lared by the board of directors.

All life annuities offered by NTUC Income are participating contracts. We offer some short term annuities as non-participating contacts.

12. Can I cancel my life annuity to get a refund?

You are allowed to cancel the annuity contract within three months of purchase and get a refund of the capital sum with interest earned, subject to deduction of some charges and any payments made to you.

Under the Classic plan, you can allowed to cancel the annuity contract at any time before age 62 and get a refund based on the terms of the contract, i.e. a refund of the capital sum with interest earned, subject to deduction of some charges.

After the annuity payments has commenced, you are generally not allowed to cancel your annuity and get a refund. The annuity is intended to be a lifetime contract.

If you insist on cancelling the contract, we can pay the refund that is applicable in the event of early death. This refund is usually not attractive to the annuitant.

Under certain circumstances, we may pay a higher refund, but this is entirely at our discretion. We have to make sure that the request for cancellation is not an attempt to take unfair advantage of the fund.

13. Should I keep my capital sum to pass to my children?

You have other assets, including your property, that can be passed to your children. This is more than sufficient.

You should invest a certain capital sum in a life annuity for your own benefit. You have to take care of yourself. This capital sum does not need to be kept for your children.

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