What exactly is an annuity?
If you’ve read anything about retirement planning in Singapore, you’ve probably come across the terms “annuity,” “annuity plan,” and “private annuity,” or what insurance companies refer to as a retirement income plan. An annuity, to put it simply, is an insurance product that provides a guaranteed lifelong income and can be included into a retirement plan. In almost all cases, Singaporeans will have a CPF Life annuity when they retire. But because CPF Life payouts are frequently insufficient to support a better-than-basic retirement lifestyle, private annuity products become beneficial in supplementing your retirement income in this situation.
How Do Annuities Work?
You can designate either a lump sum or a fixed monthly or annual premium for a specific payment duration with an annuity plan. Your premium payments are combined with those of other policyholders. This money is reinvested by the insurance firm in the pursuit of greater returns. In most cases, a sizable amount of the funds is allocated to bonds, a riskier asset class for investments. In exchange, the majority of plans guarantee the capital and also provide a bonus that is not guaranteed. In other words, you are essentially giving the insurance company the risk of volatility while still getting to enjoy the benefits.
When you reach your selected retirement age, you will start receiving a monthly or annual retirement income that is guaranteed (and, if necessary, non-guaranteed). Depending on the selected plan, the payouts may be made over 10, 20, or life.
The Various Annuity Types in Singapore
1. Immediate Annuity
The income payouts on an immediate annuity, which are typically made with a lump sum payment up front, begin immediately, as the name implies, either on a monthly or annual basis. It is best suited for individuals who are still working towards their ideal retirement age.
2. Deferred Annuity
A deferred annuity has an accumulation phase before payments start. The accumulation period may last for five, ten, or fifteen years, for instance. Longer accumulation periods are typically preferred by those with more time on their side because they allow for more capital growth.
3. Lifetime Annuity
For as long as the person lives, a lifelong annuity pays out an income. This eliminates the possibility of running out of money during retirement. A lifetime annuity on one’s own life might also be purchased, with ownership subsequently being transferred to a child or even a grandchild. This will prolong the payout period and, as a result, leave a legacy for future generations. What if someone passes away too soon? Will the beneficiary be compensated in any way? There very well may still be a death benefit payment. The recurring payments and the death benefit will typically at least equal the total premium you have paid for the plan.
4. Annuity with Fixed Periods
An income is provided via a fixed period annuity for a specific amount of time. Usually, it lasts for 10, 20, or 30 years. Most individuals might not understand the 30-year payment option, but consider this: Singaporeans have an average life expectancy of 84.8 years! (Source: The Burden of Disease in Singapore 1990-2017 report, by the Institute of Health Metrics and Evaluation in the United States in collaboration with the MInistry of Health). At age 55, if one were to take things more slowly, the 30-year payment plan is very reasonable. At maturity, a fixed term annuity may alternatively offer a different, non-guaranteed payout.
5. Single Premium Annuity
This is a term used to describe an annuity plan that is funded by a single upfront premium payment.
6. Flexible Premium Annuity
This is a term used to describe an annuity that is supported by a series of recurring premium payments from the time the plan is first established until the planned age of retirement. In Singapore, the most popular kind of annuity or retirement income plan combines the characteristics of a delayed annuity with a fixed payout period and flexible premium structure.
In summary:
Plans for annuities have developed along with the times and now include features and perks that address various demands. In other words, the annuities you can purchase in Singapore fall into the following categories:
- Annuity with a Short-Term Payout
- A lifetime payment annuity
- Joint-life payout annuity (limited duration or lifetime)
- Annuity with Inflated Income Payout
- Long-Term Care Insurance Annuity
- Annuity with Capital Protection (for a set amount of time or for life)
- Multi-Generational Income Payout Annuity