Monday, September 15, 2008

Guaranteed drawdown pension

Hi Mr. Tan,

What are your views about this type of pension? If a UK insurance company can offer something like this, surely the Singapore government can offer something like this on annuities for post 62ers? Or least something better than what we will get.
http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/business/7595951.stm

REPLY

I promoted the concept of pension drawdown with an investment fund (i.e. equity, bond or mixed fund). The idea is that you invest your savings in the investment fund, earn a market yield (which can fluctuate wildly) and draw down each month what you need. Any balance in the fund on death of the investor is paid to the estate.

You can calculate the monthly drawdown to last until you are (say) 120 years old. As most people will not live to that age, there will always be some balance that is available.

If you are investing for many years, you reduce the risk of the investment fund as you will get some good years and some bad years, which will give an average yield over the period.

The UK product works in a similar way. It has an added feature to provide the guarantee. I usually advice people to avoid buying this type of guarantee, for the following reasons:

> it is costly
> it is not transparent
> the financial institution backing the guarantee can go bust (like what is happening to the credit default swaps,etc)

Take risk. Risk is to your advantage. Stay with the transparent products. Avoid structured products (like this type of guarantees),-
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1 comment:

zhummmeng said...

When planning your retirement there are number of ways to fund your retirement.
1. a draw down plan
2. annuity
3. both
Which of these is the best for you.
Of course how much you have will decide how much is your income need(life style).
Before considering one of the above find out the family life expectancy history,family medical history, your health now and estimate your own life expectancy.
Everyone's concern is outliving the fund but by how long is another question to consider. Then
another thing you must know is that at the beginning you may need more money and it will tail off as you are near the end of your life.
From the above choose the most appropriate strategy and don't jump into the first offer that comes along that promises a life long income. (ntuc agents are very good at using this spiel; they even threaten you that leaving with CPF will leave you dry in a short time; which is not true).
Remember to ask how long is 'for life'? As i say above consider your family's life expectancy history and your health. Is 85 years old considered long enough? In fact many are afraid to live to this age. If 85 is long enough I think the best option is leaving your minimum sum with CPF and use a draw down strategy with your other fund. Together you will get the maximum benefit of more money and money for emergency use. And you don't need to spend all of it away, right? You can save some and this will further provide you longer than you planned.
Of course if think that you will live past 100 years old then you must consider CFPlife annuity insurance with your CPF MSS..or maybe an annuity with a private insurer. Private insurers' payout
isn't attractive relatively but what to do if you are going to live until you are crooked and can't walk, maybe past 120?
BUt as I say earlier if you have a proper and competent adviser to help you with a draw down plan and leaving your MSS with CPF there is a high probability that you have a
good retirement income for 'life', maybe past 90. I think this is a reasonable expectation.
But first and most important step to take , look for an honest and competent retirement planner. Please for your own good, don't ever use an insurance agent or an agent masqueraded as consultant or senior or executive consultant and NEVER one with all those logos and marks of mdrt, mrt or ttot. These are scammers. Your retirement will go up in smoke and you may have to continue to work behind Mcdonald counter, or as toilet cleaner or walk here walk there in your void deck. So be careful when choosing your adviser. He or she is supposed to be your financial life coach for life and not a snatch thief who snatches a sale from you and disappears.

September 15, 2008 11:19 PM

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