Question: If I buy an annuity that pays out a fixed monthly sum over a lifetime (say 30 years or longer), will I lose out if interest rate and inflation increases in the future?
If you buy an annuity that pays a fixed monthly sum, the interest rate and payout is locked in for all the future years.
If interest rate falls, you continue to get the fixed monthly sum and is not affected by the lower interest rate. If interest rate incrases, you will not enjoy the higher interest rate.
Question: Should I take the risk of locking in the payout for all the future years?
In my personal view, it is better to buy a participating. It guarantees a lower payout and distributes a bonus that depends on the yield earned in the future. The bonus is not guaranteed and can be nil in some years. It is likely to vary between 0 to 4% yearly.
The payout under this annuity is low in the initial years, but will increase in subsequent years with the bonus.
If you buy this type of participating annuity, it is important that you choose an insurance company that distributes a large part of the investment gain to the annuitants, and not one that tries to maximise profits for their shareholders.
Why not turn all CPF contributions from the very beginning to an insurance, be it endowment, wholelife, or annuity? I'm sure the return will be much higher than what CPF is offering now.
ReplyDeleteThe current issue on CPF annuity has revealed that insurance products are not easily understood by many people.To compound the problem we have insurance salesmen who are prowling to pounce and exploit the situation.From the grapevine there are already talks like that.
ReplyDeleteIf we have advisers like Mr. Tan, customers will be in good hand.In explaining the annuity Mr.Tan demonstrates patience and painstaking efforts to highlight the strengths and weaknesses of various options.He even gives an opinion of whether the product is good for whom. This is what customers should get when
being advised so that a judicious decision can be arrived ,unlike the way insurance salesmen who up-play the strengths and conceal the weaknesses and other facts.
It is a relief to know that the future annuity will be run by CPF instead of leaving it in the hand of insurance salesmen.
The participating annuity described is good but not good enough to hedge against inflation. Inflation over the long term is 3%.
ReplyDeleteTake for example
NTUC INcome's annuity, the payout is low and it will take about 20 years to catch up with CPF's current payout assuming a bonus rate of 2% (By this time the annuitant is 82 or 85.)But the historical average returns of bonus rate is about 1.5%.Take this as fair assumption INcome's annuity is no way comparable to CPF's;it will take longer to match the payout of CPF.
The problem with this type of annuity is that it has a guaranteed component. Too much of the money is tied down to bonds and left little to to be exposed to equities. Too much exposure to bonds stifles the return unlike variable annuity which uses life cycle asset allocation funds with a guaranteed feature.
The long term interest rate is expected to be low if the 20 years SGS which has a yield of about 3.48% is of any indication. If annuity is to be designed with bonds forming the large part of it, i don't see any private annuity beating the CPF. The CPF will be still the indisputable best.