Annuities as an Investment Option for Retirement Needs

One of the biggest concerns we have in our golden years is outliving our savings. As such, it is important that we accumulate enough savings to see ourselves through a longer period of retirement.

One investment option which is suitable for our retirement needs is annuities. In this article, MoneySENSE explains what annuities are and what we should consider when buying such products.

Case story

Mr Ang, a 55-year-old widower, is planning to retire at the age of 62 and does not wish to depend on his children during his retirement years. He has approached a financial adviser for advice on how he can make use of his savings of $100,000 to generate income throughout his remaining years.

After conducting a needs-based analysis using information Mr Ang provided, the financial adviser recommended that Mr Ang purchase a deferred annuity now. Mr Ang will have to pay a lump sum premium of $100,000 now to receive a regular monthly income of $500* from age 62 for as long as he lives. After consulting his family members and shopping around, Mr Ang decided to purchase the deferred annuity.

*Figure is for illustrative purpose only.

Features of annuities

  • An annuity is a type of life insurance policy, which is usually purchased to provide for our retirement needs. Annuity premiums may be payable as a lump sum or through regular payments for a fixed period of time.
  • The most important benefit provided by annuities is the stream of regular monthly income payable to you upon your retirement. This regular income is payable to you until death. This means that the longer you live, the more you would receive.
  • Some annuities may provide for a minimum guaranteed period of monthly income, say ten years. In such cases, the insurance company will continue to pay the monthly income until the end of the guaranteed period even if death occurs during this period.
  • There are also annuities that pay minimum guaranteed death benefit in the form of a lump sum payment for death that occurs during the first few years of the policy. The lump sum payment would be the amount of premiums paid minus the sum of monthly income received.

Types of annuities

Immediate annuities vs deferred annuities

Immediate annuities typically pay regular income one month after the lump sum premium has been paid by the policyholder. Deferred annuities pay the regular income a few years after the lump sum premium has been paid.

Non-participating annuities vs participating annuities 

Benefits under a non-participating annuity are fully guaranteed by the insurer. For a participating annuity, the benefits are divided into guaranteed and non-guaranteed portions. The non-guaranteed benefits will vary depending on the performance of the insurance fund.

Ways of buying annuities

Annuities are commonly bought using CPF savings under the CPF Minimum Sum Scheme. These are typically deferred annuities purchased at age 55 when you withdraw your CPF money, with the regular monthly income commencing at age 62. Annuities can also be purchased using cash.

MoneySENSE Tips for consumers

  • You should understand how an annuity works. It is also important that you read your contract terms and conditions carefully before purchasing an annuity. If there is anything that you do not understand, seek clarification from your financial adviser.
  • Like all other types of insurance policies available, buying an annuity is a long-term commitment. You should plan your finances and insurance needs carefully before committing your savings to an annuity. You should shop around to ensure you get the best value available.
  • For annuities with fixed regular income stream, you should bear in mind that the purchasing power of such income may be lower due to the effects of inflation.
  • You should note that annuities do not typically have surrender value, and may not necessarily include death benefits. As such, it may not serve the purpose of inheritance well.