Tan Kin Lian's Blog: Fixed and variable annuities

Sunday, October 11, 2009

Fixed and variable annuities

This article explains the concept of fixed and variable annuities.

7 comments:

zhummmeng said...: There is no one right annuity. It depends on a lot of factors.
A fixed annuity can address longevity risk but if you have poor health chances are you can't enjoy the full benefits and therefore it is not for you . Whereas a variable annuity(VA) gives higher payouts and can be a hedge against inflation if you have some portions of your investment in equities. Ideal for those who think they cannot live beyond 90 years. But isn't 90 old enough?
Taking the middle road would solve both although still with some downsides.
EG. CPFLife is a variable annuity and an insurance. The payouts are dependent on the 'performance' of the 10 year average 10 year SGS .
The variability is within the range of 3.75%-4.25% rate of return. Not bad anyway.
The longevity risk is addressed by an insurance.
Currently, CPFLife is still the best and no other private annuity can come close.
Consumers must be warned against some predatory insurance agents prowling to pounce on your ignorance, gullibility and stupidity. If you a victim report this to MAS or cancel the contract.; October 11, 2009 1:40 PM
zhummmeng said...: 12000 have taken up the CPFLife. Thank goodness, these people were not robbed of their future by insurance agents who never concede that their annuity is not good for the consumers.
Of course some got hijacked on the way. Hope they realise on time and quickly switch to CPFLife.
If insurance agents really care for their clients they should advise them of the best option and not lead them astray by lies and misrepresentation because of COMMISSION.
I heard of product pushers still trying to sell and make lot of dubious claims. Pity those victims for trusting their untrustworthy agents.; October 11, 2009 11:33 PM
Unknown said...: I wonder if there is a min number of people and fund size for CPF LIFE to be beneficial to the annuitants. Otherwise actual payout may be adversely affected due to fixed costs of the scheme. Also, will marketing costs be charged to the CPF LIFE?; October 12, 2009 3:32 PM
zhummmeng said...: Once it is compulsory, it will have the critical mass necessary for the longevity insurance. There will be minimum cost for the administration.
All the middlemen like insurance agents are eliminated. The rate of return is between 3.75-4.25% or more and no insurance company can match it. It is the best.; October 12, 2009 8:39 PM
Don Lim said...: I think the really solve the problem the CPF Life should be reformed to become retirement indexed. A separate Retirement Costs Index (RCI) should be created to replace Consumer Price Index (CPI). RCI should consist of the cost of retirement for a Singaporean. Since most are Medishield and Eldershield, the additional costs resulting from hospitalization and Long-term care should be excluded. It should cover a basket of goods excluding these insured costs. Examples: food, medication for chronic diseases, public transport (senior citizen fare), clothes, annual health screening, and others. The RCI should reflect the inflation/deflation in RC in Singapore. The CPF Life should be indexed to RCI (ex-LTC and H&S). This is more realistic. By paying a fixed amount, the purchasing power may be reduced should a component of RC, such as medication, increase significantly. This means that the initial monthly annuity benefits will be lower so that more fund is invested and compounded to pay a higher monthly benefit later when the RCI increases.

In developing the basket of goods for RCI, a committee should be created. The specific components should be published on the government's website, with the costs of each component update quarterly. Payouts from CPF Life should be adjusted on a quarterly basis. If the costs of retirement become lower for whatever reason, the payout may be reduced, leaving more fund to be re-invested for later use. In this way, CPF Life can truly solve the problems of our retirees more effectively rather than simply giving a fixed amount of Sing$, which purchasing power may change over time.; October 13, 2009 2:06 AM
zhummmeng said...: CPFLIFE is NOT a public funded annuity or pension scheme but a defined contribution scheme and therefore indexing the payouts would cost the tax payers. Tax funded schemes are ALL failing.
CPFLIFE is NOT and should NOT be the only source of fund for retirement. It should be individual's responsibility to ensure their retirement funding.
Singaporeans should have started thinking about retirement fund as soon as they start to work and NOT when they are about to 'shit' or have 'diarhhea' that they start looking for a toilet.
They should have also considered to engage proper professionals from the start and NOT use salesmen or women in planning their future. Using insurance salesmen and women is like a employing conman to be in charge of your bank accounts.
They can't plan but they dump products with high commission on you and saddle you with low protection and low return products which you have no idea until it is too late.
Eg.Many young people buy wholelife or endowment as saving plans or single premium endowment saving plan.Many don't understand return, thinking that as long their money is increasing it is alright.This is NOT the way to look at the growth. Growth must be inflation adjusted in order to give a true picture of growth just like our GDP. Insurance agents don't tell you that. You are lulled into a false sense of security until it is too late.
Worse, insurance agents continue to promote low return single premium endwoment when you are in your pre-retirement stage(10-15 years before retirement). This is like putting the last nail to your retirement coffin, ie you can't retire with enough fund because this single endowment gives you about 4% return at best.If you have already accumulated enough for retirement and don't wish to grow this single premium endowment is suitable to preserve what you have because there is no growth with this product.(inflation can be 4% over the long term)
So you see, everyone MUST consider the proper professional as adviser from the start. Engage an insurance salesman you are doomed from the start.They will dump a lot of products on you and you think having a lot of products will give you peace of mind, you are wrong.
2 things likely to happen.
1.you are under insured and you are living with a bomb ticking
2. your money is NOT working hard enough as you think and you are on the way to discovering that you have NOT enough fund for retirement.
CPFLIFE provides you with slightly above subsistence living if you have full CPF minimum sum and the rest got to come from personal saving and accumulation.
I urge people to think with your head and not your heart, to start planning their future with proper tools and use qualified and honest professionals and not salesmen.; October 13, 2009 9:42 AM
Lump Sum Annuity said...: Advantages of Fixed Annuities

1. Principal Protection
2. Guaranteed Rate of Return
3. Tax Deferred Growth
4. Features similar to Life Insurance- With a death benefit feature you don't have to buy an additional life insurance policy, thus saving you money. Similar to life insurance, this feature can provide your beneficiaries with a stream of income for the agreed term.
5. Protection against outliving your retirement.
6. Protection against market volatility.; April 06, 2010 7:44 PM