Disadvantages of using Private Annuity Plan instead of CPF LIFE.
Although this post title is "Disadvantage", but we included some "Advantage" of Private Annuity against CPF LIFE too below.
From what we have found, Private Annuity Plans available in the market tend to supplement CPF LIFE instead of replacing the CPF LIFE.
Instead, Private Annuity Plans can be used together with CPF LIFE to
1) Boost your monthly retirement income.
2) Help you withdraw out a portion or the whole of your Retirement Sum.
Advantage
1) Potentially higher returns (Annuity plans invest your money into a unit trust which can bring high potential returns. However, this depends a lot on the trusts that the insurance company invests in).
2) May comes with rider benefits (Eg; cheaper insurance premiums if you buy other INSURANCE from the same insurance company you bought your annuity plan).
Disadvantage
It is fairly difficult to plan for your Private Annuity Plan to replace your CPF LIFE.
We made some comparison on our previous post HERE
1) Returns not as great as what CPF can provide.
2) Returns are not guaranteed - 4.25% is not definitely a 4.25% every year. Returns are determined by underlying investments (usually unit trust, which has a history of not performing well)
3) Might not have bequest left over for your children
4) Unable to plan accurately your future annuity monthly payouts*
*Your CPF LIFE cost (Retirement Sum) and its future monthly payout to you is determined when you reach age 55. The 2 figures will keep changing every year. Thus it is very hard to accurately plan your annuity plan to match its monthly payout against the CPF LIFE's future monthly payout.
This difficulty to match payouts might make you under-sized your future annuity payout and hence unable to withdraw your Retirement Sum out from the CPF fully.
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Err.... Both cpf life and commercial annuities are invested in similar assets. No it is NOT unit trusts lol. Just take a look at the asset allocation of the par funds of a couple of insurance companies to have some idea.
ReplyDeleteThe CPF Life Escalating Plan is the most similar to commercial annuities in S'pore. However CPF Life does not credit your share of the underlying par fund gains/interests to your personal account/capital ... hence your bequest for CPF Life is smaller than commercial annuities.
CPF actually outsources its CPF Life to 1 or 2 big insurance companies (may be foreign companies). But it doesn't disclose which companies. Maybe can find out by searching the govt tender website GeBiz for awarded CPF tenders pertaining to CPF Life.
You can estimate Retirement Sum for CPF Life since it increases by 3% annually. So by 2039 it will be $318,000 (round up to the nearest thousand). Enter this amount into the online CPF Life Estimator to see the various monthly payouts for the 3 different Plans.
The CPF Life monthly payout is reviewed annually. Potentially this means that the payout amount can decrease. Compared with some commerical annuities, with decalred bounses, if and when tere are any) the monthly payout can only get more.
ReplyDeleteCommercial annuities get around it by starting with a very low payout e.g. 40% lesser than CPF Life Standard Plan using the same amount of premium. And then increase by 1% or 2% each year on average.
ReplyDeleteCPF Life is managed by big commercial insurance companies. For its payout ranges to drop big, say -20%, I think Singapore's existance & maybe global situation will be a much bigger problem than receiving monthly payouts!