Life annuity - capital preservation

Dear Mr Tan,

Under a life annuity, the annuitant loses the capital on death. Is there a way to preserve the capital for the children?

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REPLY:

You can preserve the capital if you use only the interest. At present, interest rate is 2% per annum. If your capital is $100,000, you can use only $2,000 a year, ie less than $200 a month. This is not adequate for your needs.

If you spend more than the interest, your capital will be exhausted at some time in the future. For example, if you take out $6,000 a year (ie 6% of the capital sum), the capital may run out completely in about 20 years time, maybe earlier. Beyond that date, you will have nothing left.

When you buy a life annuity, you are pooling the risk with other annuitants. Those who die earlier will leave behind the balance of the capital in the fund, so that it can continue to make the payment to those who live longer, ie beyond the 20 years.

If you have a large capital sum, you can use a portion to buy a life annuity for yourself. You can distribute the balance to your chidren now, or invest it separately to be given to them later.