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Annuities can help annuitants convert their money into a steady stream of income over the long term to address the financial risks brought about by longevity. Through an annuity, young people can start to save and plan for their retirement early. Retirees, on the other hand, can also spend their retirement savings in a disciplined way. An annuity plan is a simple way to manage retirement funds for peace of mind. However, annuity products do come with their own unique features and varying degrees of complexities. Consumers should note the following when purchasing annuity products:

1. Long-term insurance products

An annuity is a long-term insurance product; it is neither a bank deposit, a savings plan, nor an investment product. As such, it would not be appropriate to make direct comparison with investment tools such as stocks and bonds, etc. Furthermore, there is usually no remaining value left after the end of the income period or guaranteed period of an annuity. If consumers want to leave an inheritance behind for their descendants, they should make other plans aside from annuities.

2. Early surrender can incur significant loss

As early surrender or termination of an annuity plan may incur significant financial loss, prudential considerations must be taken before purchasing one. Potential annuitants should consider their liquidity needs and ensure that they can afford to pay for the whole premium contribution period. Sufficient cash should also be set aside to pay for daily and contingency expenses.

3. Take note of the contribution period and income period

Make sure that all annuity premiums are paid before retirement. When choosing the income period, make sure it matches your life expectancy. If the income period is too short, the annuity plan may fail to achieve the purpose of addressing the financial risks brought about by longevity.

4. Shop around

Annuities are long-term products and may involve large sums of money. Consumers should make comprehensive comparisons before purchasing an annuity plan. Given that many different annuity products available in the market, consumers should compare apples to apples based on similar annuity products to select the most suitable one for themselves (e.g. deferred and immediate products differ from each other quite a lot in terms of their features and therefore, should not be compared side by side.)

5. Three focus points in annuity proposals

The main purpose of an annuity plan is to help annuitants convert their money into a steady stream of income over the long term to address the financial risks brought about by longevity. As such, when reading an annuity proposal, the focus should be placed on the premiums, annuity income and income period.

6. Differentiate between guaranteed and non-guaranteed income

Annuity incomes are usually divided into two parts, namely “guaranteed” and “non-guaranteed”. As a product that aims to provide retirement protection, the “guaranteed” part is especially important. While the “non-guaranteed” amount may seem appealing, your overall retirement income could be significantly affected if this part fails to be paid.

7. Internal rate of return (IRR) matters most

Don't be attracted by the total accumulated income / dividends / rewards, etc. as the time factor is not reflected. The return of annuity products should be evaluated and compared when the premiums paid over the full contribution period and all annuity income are converted into an annualised calculation (i.e. to compute the internal rate of return, “IRR”).

8. Make it a part of your retirement wealth portfolio

Different financial products serve different purposes and come with different features. Annuities are not growth-oriented, nor are they flexible. It serves to help retirees spend their retirement savings in a disciplined way and address the financial risk brought about by longevity. Consumers can have an annuity plan as part of their retirement portfolio, and supplement it with other financial products to address different financial management objectives for retirement.

 

 

28 December 2018