Why the best annuity in Singapore may not be enough

I HAVE always believed that annuities have a place in every retiree’s spending plan. An annuity is one of very few financial instruments – perhaps even the only one – that can mitigate the risks of both longevity and investment volatility at the same time.

This is especially important for two types of retirees.

The first is savvy in investments. He understands markets and compounding. He knows that the worst time to withdraw from his portfolio to fund expenses is precisely when markets are down, because doing so locks in losses and causes his money to run out faster than it should.

Yet, he still needs income to minimally fund essential expenses during down periods.

The second is the retiree who simply does not want to be exposed to financial market risk at all. He is not looking to outsmart the market or time his withdrawals. He wants a stable, predictable income to fund his lifestyle.

For both groups, annuities offer something markets cannot: a lifelong income stream regardless of what happens in the world.

I have long believed that the best annuity in Singapore is CPF Life, in terms of payout for each dollar of premium paid.

In an article I wrote for the Central Provident Fund Board in 2024, “How to Use CPF Life as the cornerstone of your retirement planning,” I showed that CPF Life paid an annual payout of S$0.10 for each dollar of premium, higher than the three private annuities I compared it against.

On a pure payout basis, CPF Life wins.

Some caveats

But for retirees who choose to be fully reliant on CPF Life, there are some considerations.

One, the interest rate is not fixed.

Currently, the interest rate for Special, Medisave, and Retirement Accounts, including the common pool for CPF Life’s premiums, is based on the 12-month average yield of 10-year Singapore Government Securities plus 1 per cent, subject to a floor rate of 4 per cent a year.

That floor is reviewed regularly. It has held for some time, but it is not a permanent feature. If it is ever removed or lowered, the underlying interest rate – and by extension, CPF Life payouts – could fall below what today’s retirees have come to expect.

Two, concentration risk. Because CPF Life is a government scheme, retirees who depend on it are exposed to policy risk. To be clear, I believe the risk of disruptive policy change is low as CPF has a long track record of stability.

But “low risk” is not “no risk”. From a retirement portfolio standpoint, relying on a single source of income to fund your essential expenses, or all your expenses, is a concentration risk by definition, regardless of how reliable that single source has been historically.

Three, lack of flexibility. Except on medical grounds where you suffer from a severely reduced life expectancy or terminal illness, you cannot terminate your CPF Life plan once you are in it.

And, if you rely on CPF Life alone for retirement income, you may not be able to retire earlier than 65, since the scheme’s payouts can only begin from that age.

Four, a lifestyle adjustment when one spouse passes.

CPF Life is an individually owned plan. When a spouse passes away, that spouse’s annuity plan ends. The surviving spouse is left to live on a reduced household income often at a point in life when they are least equipped to manage that adjustment, whether financially or emotionally.

Five, income is capped. CPF Life payouts are capped at the prevailing Enhanced Retirement Sum that you have set aside, no matter how much more income you may need.

A better path

During my recent work with our sister company, Havend, to develop its retirement solution, we discovered a better way to structure a retirement portfolio for those who do not want to be entirely reliant on CPF Life, and also do not want to take on investment risk.

The answer is an optimised mix of cash and cash equivalents, CPF Life and private annuities.

Space does not allow me to go into the optimisation rules used by Havend. Essentially, the process balances one’s need for liquidity, flexibility, income and importantly, protecting the surviving spouse’s lifestyle.

Insurance annuities pool longevity risk across many policyholders, which enables an insurer to promise an income payout for a fixed term or for life.

Many plans also distribute non-guaranteed bonuses on top of the guaranteed portion, smoothed across good and bad years, so the payout tends to hold steadier than markets do.

Broadly, private annuities come in two shapes.

One is a fixed-term payout that draws from your capital and any declared bonuses over a set period. It produces a higher income, which helps to bridge a specific gap for the years between early retirement and when CPF Life begins.

The trade-off is that once the term ends, the money is spent. This structure does not give the flexibility to terminate early, nor does it allow your spouse to continue receiving payouts once you are gone.

A second type is a lifetime payout, which is a relatively smaller amount but for life. Such plans are generally structured such that the underlying policy value is not systematically drawn down to fund the payout. Hence, they typically retain a surrender value over time.

Some lifetime plans let you surrender after an initial accumulation period for a value near the total premiums paid. An early surrender means you may receive materially less than what you put in.

Still, this surrender feature gives you the flexibility to terminate the plan if your circumstances change. You may also nominate your spouse to continue receiving payouts after you have passed.

I still believe CPF Life is the best annuity in Singapore in terms of payout for each dollar of premium. Because the risk of constant policy change is low, Havend and I concluded that one should at least set aside the Full Retirement Sum (FRS) as a “premium” for the CPF Life plan.

But beyond FRS, diversifying your retirement portfolio with cash and cash equivalents – and especially private annuities – will mitigate concentration risk, give you the flexibility to retire earlier than 65, allow you to terminate your annuity plan should you need to, and help maintain your spouse’s lifestyle after you are gone.

The writer is chief executive officer, Providend