Friday, August 24, 2007

Encourage more people to use public transport

The roads in Singapore are getting congested. The Government plans to extend the Electronic Road Pricing (ERP) to more roads, extend the chargeable hours and increase the rates. These are measures to reduce the congestions on the road.

The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.

I agree.

We need to encourage more people to use public transport. As a recently converted user of our public transport, I now prefer to use the train or bus, rather than to drive a car. I avoid paying ERP and parking charges and the hassle of driving on congested roads.

Previously, like many other car owners, I found the bus routes to be too complicated.

If we make some effort, we can learn how to take the bus from our home to the nearest MRT station. But, if we are travelling anywhere else by bus, it is quite difficult to find the right bus. This explains the heavy demand for taxis.

We need a revamp of our bus routes, to make it easier for many people to use them to move around.

I wish to suggest a longer term strategy and an interim measure for the shorter term.

For the longer term, we need a public transport system that has the following components.

• The MRT forms the backbone of the public transport
• Feeder services take commuters from pick up points within a town to the MRT station or bus interchange
• Express services bring commuters between the bus interchanges and provide an alternative to the MRT

The feeder services can use large or small buses and should preferably be operated by a number of small operators.

As the express bus does not require stop at pickup points, they can keep to a more reliable and frequent schedule.

This system may require a commuter to take up to three segments, if their start and end points are not within walking distance of the train station or bus interchange. This is not a problem, as the connection can be done at the same place. It is useful for the commuter to take a short walk or move around anyway.

As an interim measure, I suggest that the existing bus services be actively promoted as a feeder service. At each bus stop or MRT station, there should be a map showing the bus services that serve an area within (say) a radius of up to three kilometres. The services can be colour coded to make it easier for the commuters to pick the right bus to take to their ultimate destination.

It will also encourage commuters to travel to move around their neighbourhood.

If it is easy and convenient to take public transport, more car owners will choose this option. This has been my personal experience.

Tan Kin Lian

Revosave Plan

Several visitors to my blog have criticised the Revosave plan introduced by NTUC Income. Their criticisms are:

* It offers a low return
* It is similar to another plan actively successfully by another insurer
* It is a way to give high commission to the agent

We have to recognise the following facts:

* Some people like this type of plan, that offers several features put together. This is why the other insurer was able to sell the product very successfully. Their customers appear to be willing to accept a lower return.
* The product from NTUC Income probably offer a better return compared to the competitor's product

1. If the customer likes this type of product feature, let them buy it from NTUC Income (instead of the other insurer).
2. If the customer wants a better return, they can buy an plain endowment or ILP.

Thursday, August 23, 2007

Suitable plans for a young person

Hi Mr Tan,

I have just bought a Limited Premium Living Policy on $100,000 coverage.

I am wondering what other plans in the market I can purchase to provide a more cost-effective coverage on a lower cost. There are so many plans in the market. I am very confused.

Is there a rule of thumb of how much coverage a person should have? Would buying term insurance be more cost-effective when starting out on a career?


I hope that this FAQ will help you to make the right decision.

Discount between Hongkong and Shanghai shares

Two visitors have asked me the list of China shares listed in Hongkong that showed a large discount to the price in Shanghai.

I am not able to share this list, as my stockbroker asked me to keep it uncirculated (as he obtained it from an unofficial source).

If you are interested in the information, ask your stockbroker to get it from his firm. They have the list. It is quite easy for the firm to compile it from their financial terminal.

Allow diverse views


Mr. Tan, more people are visiting your blog because you have an open policy and you are tolerant of views expressed. People like to have diverse views.

Although you are also taking risks of an attack but so far I have seen none except for some strong views.

We've learned a lot from various postings on various subjects and not only on insurance and finance. At least our view of the insurance industry is now widened.

We now know more, example like the posting on the newly launched product, revosave, by Income. We are aware of the features and we will not be taken in by the agents of Income.

Thank you, Mr. Tan, for your stout heartedness and vision. We hope you will continue to open up your blog.

Buy annuity for a useful purpose



I think you belong to the group of investment guru who will not buy annuity. For most people, they might not even know how to invest and might not even know about or understand annuity.


Annuity serves a useful purpose, for people who need it.

I will buy an annuity to give an annual payment to my children (instead of a lump sum that they can spent away all at once).

I will buy an annuity for my wife, so that she has a steady income for her lifetime.

A view on financial planning


Mr. Tan,

Would you then agree that the government should only make it compulsory for "people who do not have enough money, and need to stretch it for their lifetime" to purchase an annuity?

In view of protecting local citizens, I agree that some form of scheme is neccessary especially for the mid to lower income. However, I do not see how a payout of 400-500 dollars for the rest of a person's life a month can significantly help. For example, 400-500 dollars for today is probably okay. Do you think it would be sufficient in 30 years time? What would 500 dollars buy you in the future?

Singapore should review once again the possibility of gaining higher returns on the CPF or even looking into the main purpose of CPF itself. Is the CPF for you to buy a home? Or for you to have some financial independance when you are unable to work? Why not force more money into the SA since it is already at 4%?

I for one believe that the OA CPF purpose in Singapore is to allow everyone to purchase a home and not something you can fall back on when you retire. Simply put, pay for your home with your CPF. Keep the minimum sum in your SA (because you have no choice but to comply).

Make sure you save at least 30% of your earned salary (WHY? because you don't have to pay the housing loan with your personal cash, so SAVE it!). Invest your savings into low and medium risk money markets or high dividend paying stocks with strong management and fundamentals.

Last but not least, educate your children. If you're stuck in this boat, a wise person once said to me 'one generation must always suffer for the rest to prosper'. How willing are you to give a better life for your children. As Chris Gardner says 'Education is a way out'. Educate, educate, educate.

Good luck.


I agree with your views, in particular:

1. Buy an annuity to stretch your limited savings for a lifetime
2. The annuity should increase to cover inflation
3. Save 30% of your earnings (but invest in and invest in a low cost, high return, well diversified fund).
4. Educate your children (but make sure that it has its payback).

A science pioneer and his dilemma

Dr. Lee Kum Tatt has received a few comments on the articles he wrote on how S & T has helped Singapore’s development. Now in his golden years he still encourages the spirit of enquiry through the study of S & T to be stepped up for Singapore’s continued progress. He has received some comments. Read about them in his blog and his replies.

Wednesday, August 22, 2007

Life Annuity for Tan Kin Lian

A journalist asked me, "Mr Tan, did you buy a life annuity? I suppose that you did?"

Here is my honest reply.

Quote: I did not buy an annuity because I have enough money to last me for the next 100 years, and I cannot live that long. An annuity is necessary for people who do not have enough money, and need to stretch it for their lifetime. Unquote.

More visitors to my blog

The stockmarket turmoil appears to be encouraging more people to read my blog. I used to have an average of 500 visitors on weekdays. I received 1,500 visitors during the last two days. This is 50% more than average.

Mortgage Insurance


The Government is drafting new rules to allow banks to take up mortgage insurance. The insurance protects banks from the risk of borrowers defaulting on their mortgages.

This insurance works well in good times. Only a small proportion of borrowers default, due to their personal circumstances such as loss of employment or severe illness. It can be covered by the premiums paid by the other borrowers.

During an economic downturn, when many people loss their jobs at the same time and property values drop severely, it can cause a big problem for the mortgage insurers.

This happened in Europe in the early 1990s. Many insurance companies that provided this type of insurance faced large losses. They had to be re-capitalised or sold to other owners.

In more recent times, we have the problems caused by the sub-prime mortgages in America. The mortgages were issued to sub-prime borrowers to generate a high return to the lender. Funds were raised through the credit market in the form of asset backed securities, with the credit risks being guaranteed by the lending institution. Several of the lenders were not sufficiently capitalised to take the losses caused by the downturn in the housing market.

Considering the risks, is it a good practice to encourage mortgage insurance as a way to transfer or spread the risks?

Here is a surprise. I think that it is a good idea. But it has to come with certain caveats.

1. The mortgage insurer must have expertise in the assessment of the risks. They should be familiar with the property market, economic conditions and lending practices in Singapore. In particular, they have to know the rules regarding the use of Central Provident Fund savings to pay the instalments under the mortgages.

2. The mortgage insurer should be required to retain the major share of the risk, and not be allowed to transfer the risk to the credit market through securitisation or other means. This is to avoid the moral hazard.

3. The mortgage insurer should have sufficient capital to allow them to ride over several years of an economic downturn.

4. The mortgage insurer should be required to use sufficient actuarial expertise to measure the potential losses and to charge an adequate premium to cover the risk. They should avoid excessive competition leading to inadequate pricing.

There is a significant advantage of the in the mortgage insurance scheme, especially for the handling of the more risky loans.

Lenders, who are hungry for business, may be tempted to lower their credit assessment standards to win a large market share. If they are required to buy mortgage insurance, the assessment is transferred to a professional mortgage insurer, which can assess the risk independently of the lending. This may impose some discipline on the lending institution.

Shares traded in Hongkong and Shanghai

A stockbroker sent me a list of more than 20 shares traded in Hongkong and Shanghai. They are probably the larger corporations in China.

The share prices in Hongkong showed a discount of 40% to 88% to the Shanghai price. The average is 64%. This means that, on average, the prices in Shanghai are about 2.8 times of Hongkong.

Either the prices in Hongkong are too low, or the prices in Shanghai are too high. It is likely to be the latter.

Investors in China will soon be allowed to buy shares in Hongkong. What will happen to the share prices? Will the Shanghai prices collapse to the level in Hongkong? Or will Hongkong prices move close to Shanghai?

My guess is that the prices in both Shanghai and Hongkong are over-valued. But, this is China fever.

My stockbroker thinks that the prices of these shares in Hongkong will move up (it is called arbitrage), but not to the same level as Shanghai. He is probably right.

Tuesday, August 21, 2007

Two prices for the same share

Some China companies are listed in Shanghai and Hong Kong exchanges. They are the same shares, but the prices traded could differ by more than 30%. I know of a large company where the share trades in Shanghai at three times the price in Hong Kong.

China has announced that they will soon allow the residents to buy shares in Hong Kong. This will mean that the prices of the same company will converge. The price will fall in Shanghai or rise in Hong or both.

This will be an interesting development.

More than 10 years ago, the blue chips shares in Singapore trade in local and foreign tranches. They are the same shares, entitled to the same dividend and voting rights. But the foreign shares trade at a higher price than the local shares.

When the distrinction between the two tranches were removed, the price of the local tranche increased to the foreign tranche. The increase varied from 20% to 50%. It was a big bonanza for the holders of the local tranche.

Adequate Savings for Retirement

I wrote an article on how to get adequate savings for retirement. It us published in the Business Times today. You can read this article here.

Life insurance policy with annual payout


A few months ago, you said that a life insurance plan that gives out a regular payment reduces the return to the policyholder. NTUC has now introduced a new plan that pays out 5% of the sum asssured each year. Does your remark apply to this plan as well?


According to the advertisement, the potential return of the new NTUC plan is 3.7% per annum. This return is lower than the return on an endowment plan. The guaranteed payout seems to reduce the return to the customer.

If you are saving for the next 25 years, you should aim for a higher return, say 5% or more. Compared to 3.7%, the difference can be quite substantial (say 17% more). Read this FAQ.

Comparing annuity with bank deposits


I saw your article comparing annuity to bank deposits. Shouldn't it be compared to CPF Special Account (SA) guaranteed 4% pa ? In fact, CPF-SA should be compared to annuity with Capital Protection (returning the balance money to beneficiaries upon death) which has lower monthly payments.

You mentioned that annuity is like a pooling of risk, interest earned is left inside the pool upon death. For CPF-SA, interest earned is returned to beneficiaries right?


The article was written to explain the difference between investing in a life annuity and in a bank deposit. This applies to the free investible savings for most people.

I have a separate article which compares the life annuity with the CPF Retirement Account. This is relevant for people who have to decide between the two options to invest their minimum sum.

Value of the Tail of the Lease

The Prime Minister has announced that HDB will be willing to allows certain categories of owners to keep the next 30 years lease on their HDB flat and sell the tail of the lease back to HDB for its present value. Part of this value can be taken in cash, while the remainder has to be kept in the CPF account.

Several people have asked me for the formula to calculate the value of this tail of the lease.

It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail

I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).

The following table shows how much you can get by selling off the tail of the lease:

Value of tail of lease, assuming the owner retains the next 30 years:

Remaining Value of Tail using
lease 2% p.a. 3% p.a.
60 years 35.6% 29.2%
70 years 40.3% 32.7%
80 years 43.6% 35.1%

For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.

If the HDB flat is worth $160,000, the value of the tail is $64,480.

If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.

Let us wait for the announcement by the HDB.

Do It Yourself Insurance

Dr Money has written an interesting article on "Do It Yourself" insurance. You can read it here.

It saves you on the high charges. There are some tips on the types of product to buy.

Capital protection for Life annuity

Hi Mr Tan,

I read your article in the Straits Times concerning Annuities. I have a question concerning longevity risk. If I were to take up an Annuity of $100K at the age of 62 but I die 5 years later. Does that mean my wife and children won't get back $100K?


If you buy a capital protected annuity, your family will get back the amount invested, less the payments that you have received.

A capital protected annuity pays about 12% less than a pure annuity (ie without capital protection).

Read this article.

Life Annuity

You can buy a life annuity with:

* The CPF Minimum Sum
* Your own cash savings (i.e. other than the Minimum Sum).

What is a life annuity? Is it a good form of investment? Read about it from this FAQ.

This article is also published in MyPaper.

Invest in a low cost fund

I have recommended that you buy term insurance and invest the difference in a low cost fund.

Some investment-linked products (ILP) in the market have high charges, and give a poor return. You have to avoid these products. This website shows a comparison of the charges.

You have to be careful about the three levels of charges:

* upfront charge to pay commission to the agent or broker
* annual charge on the investments, and policy fee
* mortality charges (to pay for the insurance cover)

The best is a "do it yourself" unit trust. If this is too difficult, you can take the next best, which is a low cost ILP.

You can buy the term insurance separately. If you wish to buy it as part of the same ILP product, you should compare the premium rates. Make sure that you are allowed to cancel the term insurance, if the cost is too high.

Insurance protection for new-born baby

Hi Mr. Tan,

Now I am planning to get a protection insurance for my newborn baby.... After listening to many insurer and products, I have finalised the below plan.... need your advise which is the best?

My main concern is I want a protection for my baby of sum assured of 100k with critical illness for whole life and my budget is hope to be within $100 monthly.

Initially I have decided to take up ILP. I met some friends who are over 50yrs old and they warned me against it as they are holding some ILP and regret it because of the high cost..... so should i spend another $20 more in other to get a traditional life policy?

(details removed)

Looking forward to your advise.


Please read this FAQ on saving for your child's education.

If you decide to buy an ILP (which I recommend), you should choose one with low expenses. This website shows you the front end charges of several products in the market.

The best is a "do it yourself" unit trust. The next best is a low cost ILP offered by NTUC Income.

For your baby, I suggest that you buy a Medishield or private Shield plan, to cover the cost of medical treatment. The premium is very low, i.e less than $100 a year.

What causes the mess in sub-prime mortgages?

The sub-prime mortgages are given to low income people who are not able to service the mortgage loans. There is a high default rate on these loans. The losses are affecting meltdown in the global stock markets.

How did this mess come about? There are two main factors:

1) The mortgage brokers earn an attractive commission to sell the sub-prime mortgages. They are not concerned about the ability of the customer (i.e. borrower) to repay the loan, or if the property is good for the customer. The brokers are motivated by the sale, and the attractive commission.

2) The lender should be the party that is interested to ensure that the borrower can repay the loan. This was the situation in past years. In recent years, they have changed to a "broker" mindset. They sell the loans, and re-package and re-sell them to the market through the asset backed securities and the collaterised debt obligations. The original lenders earn an attractive margin for providing this re-packaging service, and do not take any risk.

This is quite sad. The mortgage brokers and mortgage lenders, in their eagerness to earn the commision and the margin, have created products that are bad for the customers (i.e. the people who borrowed on the sub-prime mortgage to buy expensive property) and bad for the ultimate investors (i.e. the people who bought the ABS and CDOs in the market).

Unfortunately, there are many other financial products in the market that fall in the same category. They include high cost life insurance products and structured products.

Monday, August 20, 2007

Treasury Bill

Hello Mr. Tan,

May I ask for your guidance on what is a treasury bill and how do you invest on it? How does it work?


A treasury bill is issued by the government, and is usually for a few months. You get the interest (which is usually quote low) but the investment is very secure. You can ask your bank or stockbroker about it.

Two ways to monetarise your flat

A journalist asked me, "Is it better for a HDB flat owner to take a reverse mortgage or sell of the tail of the lease back to HDB?"

My reply is, "They serve two different needs".

If the owner needs some money and has not decided on what to do with his future home, it is better to take a reverse mortgage. This is a temporary arrangement. He can repay the loan when he decides to sell his flat.

If the owner is certain that he wish to keep the current flat, and be needs money to spend, then it is better to sell of the tail of the lease. I estimate that he can get between 33% to 40% of the current value of the flat. This arrangement is likely to be permanent. He will find it difficult to sell the flat, if the remaining lease is only 30 years.

Both methods cater to different groups of people.

Sell the tail of the lease

Hi Mr Tan

The Prime Minister has announced that HDB will bear back the tail of the lease, and allow the 3-room flat owner to keep the next 30 years. Is this a good scheme? How much can the owner get for selling this tail?


It offers another option for the HDB flat owner to raise money to live on. Assuming that the remaining lease of the flat is 70 years, the amount that can be obtained by selling the tail of 40 years (i.e. keeping the next 30 years) is, according to my estimate, about 33% to 40% of the current value of the property. It depends on the interest rate that is used for the calculation.

If the current value of a 3 room flat is $160,000, the sale of the tail of 40 years can bring between $53,000 to $64,000. Part of this sum can be received in cash and the remainder has to be credited to the Central Provident Fund account.

This is just my guess. Let us wait for the details, when it is announced by HDB.

Adequate Savings for Retirement

Many people have inadequate savings for retirement. This is due to:

* inadequate contributions
* poor return on CPF savings
* too much money used for property purchase.

I have written a paper to suggest measures to allow people to make adequate savings for retirement, by making better use of the CPF. Here is the paper. I hope you agree with me.

Sunday, August 19, 2007

Invest in AUD and NZ dollars

I asked a banker, if it is time to invest in the AUD and NZ currencies, as it has dropped by 10% against the yen. It seems to be at a more acceptable level now. He said that it is probably a good investment, as the interest rate in AUD and NZ are quite high, compared to other currencies.

CDOs problems are not over

Stockmarkets in America and Europe have rebounded strongly, following the cut in the discount rate by the US Federal Reserve Board. The Asian stockmarkets are likely to follow.

The experts told me that the CDOs problems are not solved by lower interest rate. If more hedge funds get into trouble due to the CDOs, the stockmarket may fall again.

This trend has to be watched. Be careful.

Expense ratio of insurance products

If you buy a life insurance product, including an investment-linked product, you can find out the expense ratio from the benefit illustration.

You have to look at the projected gross yield and the net yield. If you are told that the projected gross yield is 5.25%, and the net yield (after deducting expenses and mortality cost) is 2.5%, you are incurring an expense charge of 2.75% per year. That is too high.

You should try to get an insurance product with an expense charge of 1.5% or less - especially as the gross yield of an insurance product is quite modest.

If you are investing in an equity fund which aims to give you a gross return of 7%, you can accept an expense charge of 2%, to give you an net yield of 5%.

Tip: Make sure that the expense charge is not more than 1.5% per annum for a product that gives a modest return, or 2% per annum for a product that gives a higher return.

A valuable role for the financial adviser

Is there a useful role for the financial adviser? Can they provide impartial advice that is good for consumers? I have given my suggestion in this article.

Getting more people to buy Life Annuity

I wrote an article on life annuity. It explains why there is a difference between the amount payable under an annuity ($523) and the amount payable by the CPF on its retirement account ($790). It also suggest how the gap can be narrowed to make the life annuity more attractive.

The letter was published in the Straits Times (Insight) a few days ago. You can read my suggestion in this article.

LUV plan

Dear Mr Tan,

I was reviewing the NTUC Luv plan which was launched recently. This looks affordable and comprehensive considering it covers life, TPD and critical illness - which will all expire at 70.

But looking at their monthly premium at age 60 and beyond, it make me wonder if this policy is still attractive since many in that age bracket may not be able to afford $300 a month or morre premium. Pls advice.


I am not familiar with this new product, which was introduced after I have left NTUC Income.

I suggest that you should talk to an insurance adviser (whom you can trust to give impartial advice) or call their business center?

Cost of a critical illness rider

Hi Mr Tan,

Two years ago, I bought a critical illness rider for $60 per month for $50K which is attached to my whole life policy.

Is it correct to buy a rider, as it will expire should I decide to terminate my whole life policy? As I am now in my sixties, I may not want to spend too much on insurance. Pls advise.


I suggest that you should consider the following options:

1) The cost to you of continuing the whole life and critical illness rider for the next 10 years

2) The cost of an alternative method of giving you the protection

You should ask the insurance adviser to give information to you that you can understand, and make the best decision. Apart from talking to your current insurance adviser, you can also talk to another insurance adviser.

I hope that they can give you information to make a better choice.

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