Reply to Lim Yan Beng: It is better to invest in a life annuity!

Editor
Forum Page
Straits Times

I refer to the letter from Mr Lim Yan Beng entitled "It may not pay to invest in an annuity" (St Times, 8 August).

Mr Lim transferrred $37,000 from his CPF Retirement Account to pay a life annuity that pays him a guaranteed monthly sum of $183.30 in 2009, when he reach age 62. This monthly sum is payable for a lifetime and will earn an annual bonus that depends on the return from our investments.

The bonus that is added to his monthly sum is $4.60 in 2004 and $5.20 in 2005. They will increase his monthly sum to a total of $193.10 payable from age 62. This represents a notional return of 6.26% on his invested sum of $37,000. As a bonus is added each year, the notional return will increase further.

As each year's bonus is declared, it will be added to the monthly sum and is guaranteed.

In some years, if our investment return is low, we may not declare any bonus. But the bonus that were declared in past years are guaranteed. The monthly sum can only increase. It cannot be reduced.

The monthly sum will be payable for a lifetime. Many people are not aware that, with increased life expectancy, more and more people will be living beyond age 80, 85 or even 90 years. It is important that they invest a substantial portion of their savings in a life annuity that guarantees a payment to them that will continue for a lifetime.

For other types of investments, if the retiree draws out a large sum that the interest that is earned, there is the risk that the savings will be completely drawn down during their lifetime. This will leave them with nothing to live on.

The notional return quoted above is partly contributed by the consumption of the capital during the lifetime. The effective return to the annuitant is slightly more than 5% per annum, taking all relevant factors into account. This is more attractive than leaving the money to earn 4% per annum in the retirement account.

I apologise that my colleague had not given the information about our bonus in the right context to Mr Lim. This has led Mr Lim to make the wrong decision to cancel his life annuity. I urge Mr Lim to visit my office and talk to our specialist. I hope that he will reconsider his decision.

This incident highlights the importance of educating the public about the financial product that they have bought.

During the past two years, NTUC Income as intensified our effects to educate the public. We now have FAQ (frequently asked questions) about our various popular products. They are easily accessible from our website, http://www.income.coop/insurance/faq/

We also organise educational talks on various products. We invite our policyholders and potential customers to attend these educational talks. I urge them to attend the talk and have a better understanding of their product. They should also visit our business center and talk to our product specialist.

Tan Kin Lian
Chief Executive Officer
NTUC Income