Why you should maximise your CPF LIFE before other private annuity plans?

Today, an average retiree is expected to spend $1,154 a month in retirement expenses and this is going to increase over the years. Thus, ensuring that we have a steady stream of income in our retirement becomes even more important. This is where CPF Life comes into play.

CPF Life is a national life annuity scheme that guarantees lifelong monthly payouts after the age of 65 years old for Singaporeans.  

With more people being aware about how to use CPF for retirement planning and even accumulating 1 million or more in their CPF accounts , CPF Life is gaining public awareness with its importance as a retirement tool.

However, CPF Life is not the only source of retirement income. Private annuity plans have existed even before the introduction of CPF Life. Despite the wealth of available private annuity plans, CPF Life remains the government-mandated (and most likely default) source of retirement income for Singaporeans.

Here are the reasons why you should maximise your CPF Life before you consider other private annuity plans.

CPF Life provides higher returns than Private Annuity Plans

The first and foremost reason why you should max out your CPF Life first is that CPF Life provides the best returns out of any annuity plan available on the market. This is a fact acknowledged by private insurers themselves.

According to the 2016 CPF Advisory Panel Part Two Report , industry consultations revealed that “private sector annuity providers have opted not to offer such products primarily because CPF LIFE’s payouts are higher for the same amount of savings committed into the annuity.”

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For example, a close look at the policy brochure for Tokio Marine TM Retirement GIO shows that the guaranteed cash payout is only 2per cent of the sum assured with non-guaranteed proceeds making up the rest of the expected monthly payout.

For a $100,000 sum assured, the expected payout for Tokio Marine TM Retirement GIO is between $3,600 to S$5,800 a year (of which only $2,000 is guaranteed).

Taking the same amount, if you have $100,000 in your Retirement Account at age 65 and start the immediate CPF Life withdrawal, CPF Life will pay out between $7,000 to $7,400 a year, and this amount is guaranteed.

Similarly, according to the helpful illustration by MoneyOwl : the same contributions of $422,988 set aside at age 55 will yield between $37,000 to $41,000 a year for CPF Life and $17,600 to $29,000 a year for Aviva MyLifeIncome II, out of which only $4,350 is guaranteed.

This is a difference between having a monthly income of about $3,000 or a monthly income of about $1,500.

CPF Life is guaranteed by the Singapore government

Occasionally, you may come across advice from insurance advisors or financial advisors to buy policy plans from different private insurers.

This is to spread the risk that if one insurer fails to meet their projected bonus returns, the payouts from the other insurers would be able to make up for the shortfall.

If you are relying on your annuity plans to form the basis of your retirement income, CPF Life should form the backbone of your retirement plan. This is because CPF Life payouts are guaranteed and they are guaranteed by the Singapore Government which has a AAA credit rating.

This is the highest possible credit rating by international credit rating agencies. For comparison, Aviva and Great Eastern are rated AA- while Tokio Marine is rated A+ by Standard and Poor’s.

Why does CPF Life pay out higher returns?

CPF Life can afford to pay out higher returns than private annuity plans because of the following reasons:

1. CPF Life is backed by the Singapore Government and thus has access to Special Singapore Special Singapore Government Securities (SSGS). This is the same underlying assets that CPF monies are invested in and provide stable risk-free returns higher than what is available in the market.
2. CPF Life has more effective risk pooling because it is a mandatory scheme. Private insurers have to bear more cost because the people who buy private insurance may be people who are more likely to have higher mortality risk. Whereas CPF Life is mandatory and would cover everyone including those who have lower mortality risk and are less likely to purchase insurance on their own accord.
3. CPF Life has lower costs. As a mandatory scheme, CPF Life has a larger base of plan participants (namely, all eligible Singaporeans) and thus enjoy greater economies of scale. Additionally, it is not profit-driven, meaning there are lower running costs. Whereas private insurers not only have a smaller base of plan participants, they are also profit-driven and typically a portion of your annuity plan premium is going to the insurance agent as commission .

Private annuity plans provide complementary coverage and benefits.

With such benefits from CPF Life, private annuity plans seem to pale in comparison. However, there is still value in considering private annuity plans.

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In fact, if you are receiving a monthly payout from private annuity plans, you can choose to opt out from the mandatory CPF Life and be exempted from setting aside the Retirement Sum if you meet certain conditions.

Private annuity plans do not have the limitations of CPF Life. You can choose a plan that starts earlier than age 65.

Some plans have additional coverage such as cancer coverage or disability premium waivers.

Some plans have the option to multiple the death benefit such that your beneficiaries will receive more than the premiums paid.

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Additionally, as illustrated in our previous article that explored how much you need in your CPF Retirement Account to enjoy retirement, while an average retiree’s expenses may be fulfilled by CPF Life payouts, you will need to supplement your CPF Life payouts with other sources of income to enjoy a richer retirement lifestyle.

This is where private annuity plans come in to provide supplementary coverage and benefits.

By maximising your CPF Life before private annuity plans, you can form a strong guaranteed core of your future retirement income with CPF Life payouts.

Due to their non-guaranteed nature, private annuity plans and other sources of retirement income are more suited to supplement your retirement income with potential higher non-guaranteed returns or other benefits such as insurance coverage or larger behest to your beneficiaries.

This article was first published in Dollars and Sense. All content is displayed for general information purposes only and does not constitute professional financial advice.