Sunday, March 07, 2010

Buying a life annuity for a parent

Dear Mr Tan,
My father is going 58 and has  only $30,000 in his retirement account. I was thinking of helping him to purchase either the NTUC Income Classic Annuity or the Growth Plan.

Since both plans require a SRS account, I thought of buying a Growth Plan for my Dad using his retirement account to earn a get a greater return, by registering with one of the SRS operators and subsequently use this SRS account of $29K to buy Growth Plan.

Can I do that? I am not sure because I understand that there is a so called minimum sum required in RA and RA cannot be used to buy anything except annuity.

REPLY

The money in the CPF Special Account (or Retirement Account) now earns interest at 4% plus a bonus. The return from the Growth plan is likely to be 3% or less. The agent who made this recommendation is probably giving bad advice, either intentionally or by mistake.

Please ask the agent to give you a benefit illustration for the Growth plan and send it to me at kinlian@gmail.com.

It is better for you to help your father by topping up his CPF Special Account. You will enjoy tax savings on the contribution and allow him to earn a higher rate of return of 4%. When he reach age 62, it is better for your father to buy the CPF Life, instead of a life annuity from an insurance company.

You can read a chapter on life annuity and CPF Life from my book, Practical Guide on Financial Planning, which can be ordered here:

12 comments:

Ex-Con said...

To the original poster:

SRS account nothing to do with RA account. Your dad need to put in cash money into this SRS account from his pocket. SRS is used for reducing the income tax during one's working years (mostly useful only if you earn at least gross $60K and above per year).

For annuity, your dad can use cash, CPF minimum sum scheme or SRS to buy. Pls read the comments under the posting "Investment tips for retirees" first. If you really decide to go for annuity, then CPF Life is better.

For the growth plan, it has minimum tenor of 5 yrs. Hence cannot use CPF since overlap with official draw-down age of 63 for your dad. Your dad can only use cash or SRS. But like I said, SRS is actually cash.

Vital stats of growth plan:
For 5-yr tenor, the guaranteed return is 1%pa. Optimistic return is 3%pa, based on NTUC achieving 5.25%pa for its investment fund.

For 10-yr tenor, guaranteed return is 2%pa. Optimistic return is 4%pa.

Therefore, the risk-reward is NOT in growth plan's favour as compared to CPF RA. CPF will give you 4% from day 1. Furthermore, CPF will also give extra 1% for the first $60K in your combined OA, SA and RA accounts.

Even when the minimum 4% is removed by CPF from 2011, their interest rates will still be better than growth plan, taking into consideration the extra 1%.

Anonymous said...

You have been conned by the ntuc agent. I don't blame him or her becuase he or she is a salesman or conman whose only interest is COMMISSION. If there was an advice it is the worst advice that smacks of conflict of interest.
Why?
1.you don't understand what is SRS.
2.Growth requires LOCK IN FOR 10 YEARS IN ORDER TO GET THE PROJECTED 4.0%.If you fail you don't get. Historically Growth has NEVER delivered the projected return.What makes you think you will get as projected? You should make the agent guarantee the return.The truth is, at the best it might be only 3.3%.
3.Special Account NO need lock in and you get 4% and 5% for first $30K. It means every year you get these returns regardless of term.
4. Top up is the best, either with your CPF or cash which you can get a tax rebate.
5.Sack your agent and report him or her to MAS for incompetence and misleading you.

Anonymous said...

Your ntuc agent is cheating you. Growth doesn't give more than SA or RA and it is risky that you will not get 4%, maybe 3% only.
Your agent is giving ridiculous recommendation and he or she is confusing you. Listen to Mr. Tan and Mr. EX-CON.
Your agent is a conman or woman. It must be the commission. CPFLIFE is the best and advising you to opt CPFLIFE there is no commission but this is the agent's fiduciary duty to their client.
Report your agent.

Anonymous said...

I used to say that ntuc insurance agents are salesmen and women at the best and hiding behind or disguising themselves as financial consultant is to misrepresent or to con you into beleiving they are planners. They are NO consultants nor planners but salesmen and women peddling koyok products to earn them high commission and NOT your needs.
Your case is another proof. That is why they got #1. Wonder how many got conned to achieve #1?

Anonymous said...

It may also not be certain that interest rates for SA and RA will remain at 4%. What I myself am afraid of, by sticking to it, is that it may go down, and probably it will.

As for CPF life, $29K will probably give a monthly payout of around $200. If you live frugally, by all means go for it.

For interest sake, the CPF board tells us that out of 750,000 letters (correct me if I am wrong) sent out to eligible Singaporeans to join CPF life, only about 30,000+ took up the offer. That means only about 4% took up the offer, despite the carrot of a LIFE bonus of up to $4K. This must tell us something.

Anyway, the choice is for each person to choose what is best for him or her.

Anonymous said...

Anyway, by 1957 it is compulsory.
Worrying over whether CPF interest rate is unfounded. Freeing it and pegged it to the 10 year bond has one advantage , it can go up higher ( if the 10 yr bond goes up 3.75%) . On top of it CPF has fixed the floor rate of 2.5% and if you add 1% the rate will be minimum 3.5% RISK FREE. Where on earth can you get this rate for no risk? No insurance company is able to give you this rate without the lock in!!!!!
Of the 750000 how many have minimum $20K balance? Did you know NOT even 10% of the 750000 have $20K? So, how to buy? And of this some still leave in the RA and some bought Cpflife. Don't let this figure give you the wrong picture ..
There are people still unsure but still no harm done because leaving your balance in the RA will still give you good payouts except it is not for life.If you think you can live till 90 years old it is alright to leave it in the RA....BUT DON'T BUY THE ANNUITY FROM PRIVATE INSURER..you will be doomed and only make your insurance salesmen richer at your expense.These agent will have no compunction if there is a commission to be made. They will do and say all sorts of lies to sell you.Die is your business.

Anonymous said...

So long you don't buy from ntuc income or other insurers leaving it in RA or buy a CFPlife you are safe. The choice is yours but by 2013 it will be compulsory....
The number you quoted is the overall number who are 55 and above and everyone was offered and out of the 750000 only a very small number have $20,000 in their CPF balance or those who have annuity , maybe less than 10% of the 750000.
It is very miserable that only a small number have $20,000. What happened actually? tied up in the house? asset rich cash poor? lost in the stock market? lost by insurance salesmen masqueraded as investment expert?
Anyway, only 17% of CPF members who invested made more than the 2.5% and the rest lost. So, you can see a lot of smart aleks out there who think they can manage their own money well or experts in investment .They gambled away themselves or through their insurance agents. This figure sent a strong alarm to CPF that if members allowed to continue the freedom to manage their money on their own a lot of people have to forage the rubbish dumps for their living during retirement.
The extra 1% for first $60,000 on smrt accounts was mooted to stop this trend and to protect members from themselves and the insurance agents who disguised as experts.
Friends , how good are you in money management?

The Watchman

symmetrix said...

What I am about to say may rile some ppl.

Inasmuch as what many of us disagree with some govt policies, monies in the various CPF accts still offer a somewhat decent return for a generally risk-free investment. No other local FI does it better for a risk-free investment.

You might even consider parking excess cash in CPF via voluntary contributions (subject to limits), as what some ppl have done, just to enjoy the better interest rate. Being above 55 yrs old, you can make annual withdrawals if you are still working, or monthly withdrawals if you are not working. Consider this as dividend payouts from CPF.

Anonymous said...

I wonder how many more people will be conned by insurance agents?
I shudder to think MAS is in cahoot with the insurers. Everytime I read the speech by MAS to LIA I thought some drastic thing is going to happen. But many speeches have been made and nothing happens. It is talk and talk and none of the talks was direct command to the insurers to do something about the misconducts that are happening in the industry.
It is time the consumers take the actions themselves.

Anonymous said...

It is stupidiest advice from a ntuc agent. Imagine meeting an agent whose name card shows she is an executive financial consultant but doesn't know anything about finance. This is a crap. All that she knows is peddle you products hoping one may interest you.

Retiree said...

The consensus is: Leave the CPF alone.
For the time being, it pays the best rates and is fully protected and guaranteed by PAP. It will never pay lower than 2.5%.( Ordinary A/C)

TIP:
Buy some shares that is approved by CPF ( if you can ) It will receive dividends. Should you lose your job, these dividends will still be paid into the CPF, thus keeping the contributions active, even if its just twice a year.
Remember, to qualify for bonus CPF payments, or other schemes, your CPF needs to be active and thats why you may need to contribute a token sum of $50 ( as previously)
in order to qualify. Your dividends will take care of that condition automatically, regardless of employment status.

Best wishes to all

Ken said...

I didn't know that. Thank you for sharing. :D

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