Wednesday, November 01, 2006

Buy a life annuity

I advice a retiree to invest in a life annuity. You can get a better return (compared to bank deposit) and the payment is guaranteed for a lifetime.

A male at age 65 can invest $100,000 to buy a capital-protected life annuity that pays $473.60 per month (or 5.7% per annum). Each year, a bonus may be added to the life annuity, depending on the yield of the annuity fund. I expect the bonus to average around 2.5% over the long term. This means that the annuity payment is likely to increase by about 2.5% a year. This is helpful to offset the increase in the cost of living.

Under the capital protected life annuity, the balance of the capital sum (after deducting the annuity payments) will be refunded to the estate in the event of early death. Only the interest is forgone. If the annuitant lives longer and has received more than than the capital sum, there is no refund.

The annuitant has the option to buy a non-protected life annuity, which pays a higher monthly income. For a male at age 65, the non-protected annuity pays $567.40 per month (or 6.8% per annum). This is nearly 20% more than a capital-protected annuity. This annuity will also enjoy bonus.

I advise the retiree to buy a non-protected annuity, as it pays more to the annuitant. The annuitant probably have a property or other assets to pass to the children. The annuity should be kept mainly for the retiree. By accepting a non-protected annuity, the payout will be higher.

The amount of annuity depends on the age at the time of purchase, and on the gender of the annuitant. The difference between capital protected and non-protected also varies according to each person.

FAQ on Life Annuity

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