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Reader Question: Should I surrender my annuity and top up my CPF Retirement Account?

Last week, I received an email from a reader asking for my opinion if she should surrender her annuity and top up her CPF Retirement Account to get a higher monthly payout from CPF Life.

Grab a cup of coffee while you read this article because it’s going to be a long one.

Here’s how the email goes.

Hello,

I have been following your blog for a while. I refer to your blog about the CPF Life and Private Annuity Plan.

I am 65 this year, self-employed. Yearly I top-up my RA for tax relief in addition to Voluntary Contribution to the 3 accounts (OA, SA, MA). A month ago, I decided to defer my CPF payout to age 70 to enjoy the interest rate. By 70 years old, I probably would chose to join the CPF Life Scheme for life-time payout.

5 years ago (year 2014), my friend, a NTUC Income agent convinced me to buy a private annuity from her. I bought one with cash of SGD 150,000, and deferred the payout to age 65. At that time, the content in the contract communicated to me that the interest on the premium was 2.5% and the bonus was 2%. So, over the years before payout, I would receive a bit of money from the interest and bonus, even though the distribution cost is at 2%, which I think is high and for doing nothing – no financial advice whatsoever needed from NTUC Income. 

Recently, I asked for some numbers from NTUC Income. Actually, the rate of interest they pay was only 1.75% and the bonus ranging between 1 to 2% depending on their investment performance. I understand the interest rate should be guaranteed and bonus varies. I am not very happy about this reduced interest rate.

Currently, the attraction from CPF was the high interest rate at 4% as compared to all financial institutions and private insurance companies. Another 1% and an extra 1% based on the formula.

Last week, out of curiosity, I threw out a question to myself. Would it be better off for me to surrender the Annuity Life with NTUC Income and use the surrender value to top up my RA to the maximum cap allowed? 

With my original premium of SGD 150,000, the surrender value now stands at SGD 163,834.66.

My RA at CPF is currently at SGD 115,000. If I top-up my RA with the surrender value from NTUC Income, this will bring my RA amount to about SGD 279,000.

My NTUC Income Annuity plan monthly payout is on SGD 668 which shall commence monthly payout in Feb 2020. For the same amount of surrender value of SGD 163,834, using the CPF Life estimator, the monthly payout with CPF Life at age 65 is between $841 to $890 (standard plan); and if I chose the monthly payout at 70 years old, the amount is higher at $1098 to $1184 (standard plan). Just by comparing the payout at age 65, the difference is $173 ( I am using the lower amount $841 in CPF Life to less the monthly payout of $668 from NTUC Income). $173 more is quite a bit of money to receive every month for a full-time retiree in the future.

Also, even the monthly payout commences at age 65 or age 70, CPF continues to pay the 4% on the premium until the age of 82, but the 4% is put to the Lifelong Pool to sustain the payout for life, and this amount is not reflected in the premium statement. Whereas, for NTUC Income the interest and bonus will stop as soon as the payout commences at age 65. 

Based on the above reasoning, would it be wise for me pull out from NTUC Income private annuity? If I pull-out, I would want to top-up my RA with the surrender value from NTUC Income to enjoy a higher payout in CPF Life. 

Actually, I have another small annuity of $56,000 with NTUC Income since 2009. After 10 years the surrender value now is $77,000. The monthly payout is $368 and shall pay me in June 2019.

I like to hear your comment.

Thank you.
M

Before I begin, I wanted to address a few points that M has done incorrectly.

Calculating the additional CPF Life payout received if the annuity was surrendered and added to CPF Retirement Account.

This way M calculated how much additional CPF Life payout she would receive if she surrendered the annuity and moved that money into her CPF Retirement Account was incorrect.

She should use the total of $115,000 + $158,000 (I’ll explain why we don’t use the full annuity surrender value later) to calculate the surplus monthly payout instead of just the $163,834.66 (annuity surrender value) alone.

Here’s how the figures look like:

  • Monthly payout from just $115,000 in CPF Life Standard Plan: $613 – $649 (withdraw at age 65) and $801 – $861 (withdraw at age 70)
  • Monthly payout from $115,000 + $158,000 in CPF Life Standard Plan: $1,358 – $1,441 (withdraw at age 65) and $1,764 – $1,907 (withdraw at age 70)

Like what M did earlier, we use the lowest amount to calculate the surplus monthly payout. The additional monthly payout M will get for putting the surrender value of her annuity in CPF Life becomes $745 (withdraw at age 65) and $963 (withdraw at age 70).

If we compare against the monthly payout of $668 from M’s annuity, the difference is actually $77 (withdraw at age 65) and $295 (withdraw at age 70) instead of M’s original calculation of $173 (withdraw at age 65).

How much can you top up into your CPF Retirement Account?

When M reached the age of 55, her CPF Retirement Account would have been created and money would have been moved from her Special Account and Ordinary Account into her Retirement Account.

As M’s birthday falls before 1 July 2009, her Full Retirement Sum is $106,000.

The way to calculate the maximum amount M can top up into her Retirement Account is by subtracting M’s Full Retirement Sum with the Enhanced Retirement Sum (2019). The current Enhanced Retirement Sum is $264,000.

$264,000 – $106,000 = $158,000

While M’s annuity has a surrender value of $163,834, there will be an excess $5,834 that can’t go into her Retirement Account. M can make a Voluntary Contribution into her CPF accounts and let that money go into her Ordinary and Special Accounts (her Medisave Account is already maxed out) to continue growing her money.

By the way, I’ve clarified this with the CPF Board and they do not consider the interest earned in the Retirement Account in this calculation. So the extra $9,000 in M’s Retirement Account has been excluded.

Pros and cons of keeping your money in an annuity

Below is a list of pros and cons of having an annuity on top of CPF Life.

ProsCons
Ability to surrender your plan to have access to emergency fundsMonthly payout is subjected to bonus declared by the insurer
A separate stream of retirement income for diversificationMonthly payout is usually not as high as CPF Life

In M’s case, she will have access to $163,834 from her annuity as part emergency funds if anything bad happens. Naturally this figure will gradually shrink as the insurer makes monthly payouts to her.

Pros and cons of surrendering your annuity and topping up your CPF Retirement Account

Here are the pros and cons of surrendering your annuity and topping up your Retirement Account for CPF Life.

ProsCons
Higher overall monthly payout for retirement incomeCPF Life monies cannot be withdrawn
Steady monthly payout from CPF Life with minimum fluctuations

Since M is willing to defer her CPF Life payout till 70, she’s looking at an additional CPF Life monthly payout of $295 which is make a substantial difference to a retiree.

It could easily pay for your monthly transport and/or utility bills easily. If basic living expenses are already covered, that $295 can even pay for a few nice meals in restaurants with family and friends each month.

So what should M do?

I’m assuming that M healthy and will live till at least Singapore’s average life expectancy of 85.4 years. That’s at least 20 years of retirement life that she can look forward to.

Here’s how I think M can consider doing.

Option A: If M already has a reasonably large sum of money (say $200,000) set aside in risk-free investments like Singapore Savings Bonds, she can choose to surrender her annuity and to top up $158,000 into your CPF RA. she can also choose to surrender only partial of her annuity to top up her CPF Retirement Account. That will maximise the retirement income she will receive from CPF Life.

Option B: But if she doesn’t have any other emergency savings set aside and these annuity plans are basically her only liquid assets, then I’d suggest she keeps her annuity plans (she can choose to surrender the annuity plan with a lower value to top up her CPF Retirement Account and keep the other plan) so that she has some flexibility in her retirement lifestyle in exchange for a slightly lower monthly payout from CPF Life and her annuity plans.

In any case, M sounds like she’s a prudent person so I don’t think she can really go wrong with either options. It’s more about making an informed decision based on her circumstances.

Side note on CPF Life enrollment

By the way, M can enroll into CPF Life as early as 1 month before your 65th birthday. But what’s important to note is after choosing her CPF Life Plan (Basic, Standard or Escalating), she will only have a 30-days grace period to amend your choice of CPF Life Plan.

By popular demand: My favourite slides from the Seedly Personal Finance Festival

Many readers have emailed me asking if I could share photos of the slides taken from the festival.

Here are my favourite slides that were presented by the various speakers. I must highlight that it’s easy to take the images out of context if you weren’t present at the festival and heard it first hand from the speakers.

I’d strongly encourage that you contact the speakers directly to find out more about what they have presented if you have any questions.

Speaker information

My 6 key takeaways from the Seedly Personal Finance Festival 2019

Today, I spent 8 hours on a Saturday at Singapore’s largest personal finance event – Seedly Personal Finance Festival 2019. I repeat, 8 whole hours! That’s the number of hours I spend in the office on a work day.

Who would have thought that young adults would pay to wake up early on a Saturday morning to attend a 1-day event to listen about personal finance? Great job, Seedly!

I’m not going to do a full recap of what the speakers have said because that’s 8 hours worth of content and a blog article will not do the speakers justice.

What I’m going to do instead, is to highlight 6 key takeaways that resonated with me and I will take action on.

Please note that this article is my interpretation of what I heard from the speakers and may differ from the original meaning of the presentation.

1. How long do you need to have insurance

When I planned my insurance needs, I looked at it from the perspective of how much do I need to recover from a critical illness or survive when I have problem taking care of myself. What I have not considered, is how long should I keep my insurance policies.

Christopher Tan, CEO of Providend and Executive Director of MoneyOwl shared his approach in deciding how long you need to have insurance. The income replacement component of an insurance plan is no longer relevant if you are of no economic value to anyone.

Let that sink in a bit.

If you are retired and no longer earn an income, you can consider not having some insurance policies such as Disability Income insurance and Critical Illness insurance that are meant events where you need to replace your loss of income.

Likewise, if you no longer have a dependent that needs to be supported by you, why should you continue to maintain a life insurance with a high death insurance coverage?

Action: I will examine my insurance plans and plan a cut-off age where I will reduce the coverage or even terminate some policies based on my retirement plans and dependent needs.

2. Job security may soon be a think of the past

In his presentation, Christopher Ng from Tree of Prosperity talked about how skillsets are deteriorating at a much faster pace. I totally agree with this comment.

In the past, if you were to study accountancy, you could work as an accountant for many years, or even decades using your accountancy skills. Today, if you graduate from university to become an accountant, your skillset will probably last 1-2 years (or less) before you need to learn new skills such as data analytics to perform high-level tasks as the industry continues to embrace automation.

Workplace toxicity is also present in many companies. Employees in Singapore are working much longer working hours than many other developed countries. The work life balance that we yearn for are not materialising.

Action: Identify skillsets that will improve my employability and take up courses to acquire these skillsets.

3. Build a financial safety net first before investing in the stock market

Loo Cheng Chuan from the 1M65 movement shared his story about achieving 1 million in CPF and talked about the benefits of acquiring a financial safety net through CPF before investing in the stock market.

I have to agree that knowing you have 1 million dollars waiting for you in your CPF accounts at 65 can provide you with a peace of mind. This peace of mind can be very powerful as you can afford to take more risk in your investment knowing your life isn’t over even if you incur some losses.

While I’m not planning to accumulate 1 million dollars in my CPF accounts, I intend to continue to pursue my mid term goal of achieving FRS in 5 years.

Action: Continue to top up my CPF Special Account to achieve Full Retirement Sum in 5 years’ time.

4. Grow your financial knowledge stack and don’t outsource your investment activities

Christopher Ng talked about the need to grow what he calls, your financial knowledge stack. Folks from the tech industry know the term, ‘stack’ very well. Essentially you equip yourself with knowledge on a set of technologies and programming knowledge that allows you to create and manage an application.

Likewise when we look at financial knowledge stack, it’s about equipping yourself with a set of financial knowledge to make informed financial decisions that’s tailored to your personal needs.

This is important because if we outsource the work of managing our personal finances and investment portfolio to what he calls, ‘financial salespeople’, these people are going influence you to act against your best interests if it conflicts with theirs (to earn commission).

Here’s the Financial Knowledge Stack that Christopher Ng shared.

Financial Knowledge Stack by Christopher Ng

Action: Put together my own Financial Knowledge Stack, identify what I lack in and work towards equipping myself with the relevant knowledge.

5. Choose an investment strategy, learn and take action

What I loved about the Seedly Personal Finance Festival was the diverse investment topics that the speakers presented. There’s no one-size-fits-all investment strategy that works for everyone. We have look within ourselves to identify the investment strategy that works for us. The one that allows us to sleep peacefully at night.

We had 3 speakers talk about 3 different investment strategies – Alvin Chow from Dr Wealth talked about Value Investing, Joel Sim from Mr Finance Savvy talked about Trend Trading and Victor Chng from The Fifth Person talked about Dividend Income Investing.

These speakers shared about their approach towards investment on a high level given the amount of time allocated for their sessions and provide some insights into why their investment strategies worked for them.

If you’ve been reading my blog, you’d find that I don’t write a lot about investing because that’s not a topic that I am well-versed on. I’ve only invested in index ETFs and done so through a Robo Advisor.

I had the opportunity to chat with Dawn Fiona from SG Budget Babe during the break and her recommendations for a newbie who is learning to invest for the first time. Here are some of her recommendations.

Before starting on your investment journey, ask yourself first these questions. What are you investing for? What’s your time frame in the market? And which methodology matches your personality and lifestyle better?

For some of us who are busy (e.g. parents) and don’t have time to check the markets regularly, strategies like fundamental momentum investing or trading will not be suitable for us because we cannot react in time and grab opportunities when they appear. In such cases, tools like ETF RSS plans or DCA methods would serve us better.

But if you enjoy analysing and have time and effort to spend on it, then why not value or growth investing which might be more suited to us.

Figure out which suits you better, learn more (through books or courses) and then apply and stick to it.

I intend to do something about that this year.

Action: Learn more about the 3 investment strategies shared in the festival and pick 1 that suits my preferences. Spend a lot of time to study on the chosen investment strategy.

6. Build your retirement portfolio, one brick at a time

Most of the festival attendees are young adults who are in the early stages of their careers. That means they don’t necessarily have a large sum of money to invest in their retirement portfolio today.

I love how Christopher Ng presented his lego-brick analogy to help young adults get started on building their retirement portfolio, one brick at a time. His example of ultimately forming a middle finger with 48 bricks that you can show to your unappreciative boss when you FIRE was the icing on the cake.

His take on starting your retirement portfolio was very simple. Save $20,000 and invest it on stocks, bonds, and REITS that yield better than 7%, and you will be able to get at least $1,400 a year.

That’s your first brick.

Action: Take a hard look at my retirement expenses and calculate the number of bricks I need to build in order to retire.

Did you attend the Seedly Personal Finance Festival? What were your takeaways from the festival? I’d love to hear about them in the comments section below.

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