You might have heard friends talking about annuity insurance policies in their retirement planning. There are different types available, and several factors to consider before you figure out if this is right for you.
What is an annuity plan?
An annuity is a type of insurance policy. These plans provide a regular stream of income for as long as you live, or for a stated period of time, usually until at least the age of 100.
The monthly or annual income you get can be made up of guaranteed and/or non-guaranteed components. An immediate annuity can begin income-for-life payments within a year of the purchase, or payments can be postponed to the future with a flexible premium deferred income annuity.
What kinds of annuity plans are there?
An annuity that begins paying out right away. If you need income right away or within 12 months, consider an immediate annuity. It’s a good option for anyone interested in having guaranteed monthly income. After you provide us with a single, lump-sum payment, we’ll distribute income to you based on a schedule you decide (for a select period or for life).
An annuity that begins paying out later. You may get bigger payouts this way because your money has more time to accumulate investment gains.
You pay a premium that’s invested at a fixed rate. The investment grows based on a guaranteed rate of return. A fixed annuity is a good long-term retirement investment for people who want the stability of a fixed, reliable interest rate. After you start the annuity, you’ll receive a guaranteed rate of return each year on your premium (the amount you contribute). And, when you’re ready to retire, you can receive guaranteed income payments.
An annuity that allows you to choose where to invest your premium, such as in mutual funds and bond funds. Depending on the provider, the annuity might provide a guaranteed minimum return and/or cap the maximum amount of growth. That means your investment returns or payments may never fall below a certain level (or go above a certain level). Some plans that promise higher earnings also carry more risk.
If you want to invest your money over the long term and want to take advantage of the highs and lows of the financial market, look at variable annuities.
Why people buy annuity plans
An annuity can provide a steady and regular stream of income. Some countries provide a basic form of annuity via their social welfare policies. In Singapore, CPF Life is a form of an annuity but it is typically insufficient to sustain most people’s entire retirement lifestyles.
Fixed and variable annuity plans are great options for people thinking about their eventual retirement if it’s some decades away, while immediate annuities are good for those nearing retirement who want income right away.
Some people want to provide their beneficiaries with a stream of income, instead of giving them a lump sum and worrying that they will spend it unwisely in a short time. It also allows people to pass their wealth on to the next generation without the hassle of going through probate.
Real estate investments incur property taxes and sellers stamp duties. In the case of US equities, capital gains taxes are also imposed.
On the other hand, all annuities received in Singapore are not taxable (for example, CPF LIFE Scheme payouts) unless they are received from the following sources:
|How the Annuity is Taxed Each Year
|From the carrying on of a trade, business or profession, or through a partnership in Singapore
|– 3% of the total amount you paid for the annuity; or
– If the total annuity payouts you have received is equal to the amount you paid for the annuity, any further amount of annuity payout received is taxed in full.
|Supplementary Retirement Scheme (SRS)
|100% or 50% are subjected to tax upon withdrawal, depending on the circumstances. To find out more, please refer to Supplementary Retirement Scheme (SRS).
|Annuity policy bought by your employer, in place of a pension or other employment benefits which are payable to you during employment or upon retirement
|Full amount of payout received
What are the pros and cons?
Guaranteed income source (Not for variable annuity)
For retirees and pre-retirees, a guaranteed income source reduces concerns about losing money from retirement savings in a downturn, or outliving retirement savings. With an annuity, you fund the account and typically earn a predetermined amount of interest, regardless of what happens in the stock market.
Variable annuities are riskier because they do not always offer a guaranteed income.
Ease of money management
With most of us living out a longer period in retirement as a result of longer lifespans, the risk of loss of mental faculties is a real problem.
With annuities, this provides a stable stream of income without the need for complicated management that investing in stocks and funds and even real estate requires. Hence with an annuity, we can be assured of a stable income stream without worry.
No control over the returns (for fixed annuities)
The guaranteed feature of the fixed annuity on a flip side gives you no control over how the returns are yielded and what your monies are invested into.
No control over the overall funds
Annuities are meant to be long-term investments. For a period from the point of signing up usually between six to eight years when you are not supposed to make a lump sum withdrawal or cancel the policy. And if you do, you are not likely to get your initial invested capital. Before signing up, make sure you won’t need your money back in the near future.
Are annuities right for you? What other ways of retirement planning should you consider? Start your journey with the Planner Bee app, and you can find out more through connecting with our helpful advisors.