Sunday, April 06, 2008

Immediate or deferred annuity

An immediate annuity pays the annuity payment immediately. A deferred annuity pays the annuity payment at a specified date in the future. During the deferred period, the invested sum is invested to earn interest.

If you do not need the annuity payment immediately, you have the following options:
a) buy a deferred annuity
b) invest your money separately and buy an immediate annuity at the future date

Your choice depends on the terms that you are offered. For example, if the insurance company pays 2.5% per annum for the deferred period, it will be attractive compared to leaving the money in the bank to earn 1%.

If you buy the deferred annuity, you are locked into the contract now. If you wish to withdraw from it later, you may be subject to penalty. You should choose the deferred annuity only if you are sure that it is what you really want.

My preference is to invest separately and buy an immediate annuity at the time that you need the annuity payment. For example, it is better to keep your minimum sum in the Central Provident Fund until 62 or 65 years, and earn interest at 4% plus bonus of 1%. You can decide at 62, if you wish to switch to an immediate annuity at that time.

Lesson: Keep the flexibility. Do not be locked into a contract that you cannot change. If you buy an annuity contact, stick to it for the entire period.


Anonymous said...

Someone posted that buying immediate annuity is better than deferred.
He argued that the one who buys immediate is paid ahead of the one who buys deferred although the immediate payout may be lesser but then the immediate one already has collected some substantial sum.
Example; immediate pays $5000
5 year deferred pays $6000
but immediate already collected $25000 and this more than offsets the low payout as compared to the deferred one. The deferred even after 10 years may not have paid out more than the immediate one becuase the immediate annuity has $25000 headstart.
Mr. Tan, is it a sound argument?
Please clarify and help us to understand.

Tan Kin Lian said...

You should buy a life annuity at the time that you need the payment.

There is no need to buy a life annuity earlier, as you have to reinvest the payment that you do not need.

If you need the payment at a later age, you can buy a deferred annuity now (if it gives good return for the deferred period) or invest the money in another product in the meantime.

The insurance agent likes you to buy the annuity now, so that the agent can earn the commission. But, it may be in your interest to buy it later.

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