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 read.
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.
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.
Ability to surrender your plan to have access to emergency funds
Monthly payout is subjected to bonus declared by the insurer
A separate stream of retirement income for diversification
Monthly 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.
Higher overall monthly payout for retirement income
CPF 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.