Understand the return
Many people would first look at the return of the HKMC Annuity Plan, and compare the plan against other investment products to decide whether to participate.
While it is important to understand the return on investment, unlike other investment products, the HKMC Annuity Plan serves to offer the elderly an opportunity to convert some of their savings into guaranteed and monthly retirement income. Therefore, it is not a typical investment product like stocks, bonds and fixed deposits.
The HKMC Annuity Plan guarantees that each annuitant will receive at least 105% of the premium paid from the monthly annuity payments. The principal is protected unless you opt to surrender the policy early. Annuitants who live longer can get a higher than 105% return. For example, a male annuitant who participates in the plan at 65 will break even, i.e. get back the premium paid at the age 79; he will get 105% of the premium paid when he reaches 80. Beyond that age, he will still continue to receive the guaranteed monthly payments. If he lives up to the age of 90, he would have received a total of 300 instalments of payouts equivalent to 174% of the premium paid.
Understand internal rate of return
Internal Rate of Return (IRR) is often used to describe the return of annuity products. Based on the calculation of the Hong Kong Mortgage Corporation Limited, the IRR of the HKMC Annuity Plan is about 4%.
However, we should not assume that your annual return under the HKMC Annuity Plan is 4%. In fact, the Hong Kong Mortgage Corporation Limited came up with the figure based on a set of assumptions including life expectancy. As mentioned above, the return of each annuitant depends on the entry age and how many instalments of monthly annuity payment an annuitant will receive eventually. As such, the IRR for each annuitant could be different – it can be lower than, equivalent to, or higher than 4%.
An annuity product is an insurance plan designed to address the financial risks brought about by longevity. Since it is different from bank deposits or investment products, the return should not be regarded in the same context as other traditional money management and investment products. For the elderly who are not good at money management or investment, the HKMC Annuity Plan offers an alternative for them to manage their retirement funds.
24 July 2018