Tuesday, February 12, 2008

CPF Annuity Report Recommendations

Updated 16 Feb 2008: RP Interest, and CPF Life Calculator. Thanks to mudnik for pointing this out

The CPF Annuity Report is finally out. I'm writing a short summary of what caught my eye in the report. Note that this CPF Annuity is not yet cast in stone, at least at the date of my post. These are just recommendations.

Well, they have changed the name to CPF LIFE. The full name will be "The National Lifelong Income Scheme". The name does not make a difference to me though. What will make the difference is that the CPF Board will administer it, not private insurers. This at least gives me some peace of mind. It will start at 2013. It is still in essence an annuity.

At age 55, the minimum sum will be split into 2 parts. A larger part will be in the retirement account (RA), and the rest in a new refundable premium (RP) account. Both will earn interest but the interest in your RP will not go directly to you. Instead, it will be pooled together with the RP interest from other members to fund the LIFE scheme

This scheme is fully integrated to the minimum sum scheme. Therefore, to us, we'll see no difference. The amount payable at age 65 will be the same lifelong. That may be the reason why they chose the name lifelong income. If the member passed away, the un-used funds in the RP account (includes interest if any) will be refunded to the family.

You are able to choose at which age do you want to start this lifelong income (LI). The default for everyone is 80 years old. You are able to set the age from 65 onwards, in steps of 5, to 90. The earlier you choose, your RP will be of a higher proportion, and the amount you get per month will be higher. (Please take note of the clause above in bold) At age 65, your minimum sum will be 100% RP account, and no RA, and the income will be the higher. For e.g., if you wish the LI to start at 80 years old, the RA will pay a monthly income from 65 to 80 years old. Thereafter, the RP will start paying the monthly income from 80 onwards.

The pictures below shows the old system, and the new system, using a minimum sum of $67,000, LI starts at 80 years old, RA at 5% interest, as an example. The pictures also show that once you have more money in the RA after selling your property, your lifelong income will also increases proportionately.

One might ask, why did they give so many choices on which age to start the LI. Why not all start at 65, and everyone will get the highest payout. The main reason is that they took into account people wanting to leave more money to their family if they passed on. The later you start your LI, the more they will stretch your RA, and the lesser it goes to the RP. Therefore, more money will go to your family. The other reason is that if you choose Refund65, 100% will be in the annuity and the interest from the annuity will not be directly credited back to you.

There is also an option to not receive any refunds from the RP account. This will boost your monthly income lifelong. A person who chooses LI at 65 years old, with no refund, will enjoy the highest payout.

The following people are exempted from this lifelong income scheme:
  • Minimum sum below $40,000 (you're still able to opt-in)
  • Physically or mentally incapacitated (or approved by minister) from ever continuing in any employment
  • Unsound mind
  • Suffering from medical condition leading to severely impaired life expectancy
  • Suffering from terminal illness or disease
  • Receiving a pension, annuity or benefit equivalent to LI scheme, and/or either irrevocable/recoverable by CPF in event of termination

Looking at the gist of it, I can't find any reason to fault this report. It takes care of most angles, and I would say this should have been done in the first place instead of announcing that weird plan previously. The previous plan looks very slipshod.

I wonder how much of this report will be endorsed and implemented? Hmm... Seems like the CPF Board is implementing whatever MOM has recommended. In essence, this Lifelong Scheme is a typical annuity, but with a higher interest rate. Payout seems to be more than the other annuities in the market. It will start in 2013. No figures for the 12 options are yet available though. Click here for the CPF Life calculator from CPF to find out how much you can get. One thing to note that it is not indexed against inflation. Thats the drawback of this plan.

Inflation was 2.1% last year, and this year will be at least 4.3%. The 10 year SGS bond has been hovering at less than 3% for a long time. This rate, + 1% is the SMRA's interest rate. From its history, this bond rate is useless against inflation. Therefore, don't hope that the SMRA interest rate will rise due to inflation. No such thing, if you base it on history.

You can see the full report here from MOM. CPF has also released a quick-guide here.


Anonymous said...

Hi would anyone like clear this out for me.

1. CPF is divided into three portion: a. Ordinary A/C, b. Special A/C and c. Medisave A/C.

A. Ordinary A/C:
These funds can be used to buy a house, invested etc. So this will be used for your CPF Life plan. This funds can be refunded to the member's family incase if he/she expires.

YES / NO - Please explain.

B. Special A/C:
These funds can only be used for investment. Will this funds can be refunded to the member's family incase if he/she expires.

YES / NO - Please explain.

C. Medisave A/C:
These funds can only be used for medical bills, if not sufficient then MediShield will kick in. This funds will not be refunded to the member's family incase if he/she expires.

Yes / NO: Please explain.

Thank you.


chantc said...

I think you got a little mixed up.

A. CPF-OA is used for property, some types of insurance and investments. That is correct. However, CPF Life is just an extension of the minimum sum (MS) scheme we have. That means that CPF Life is funded from the retirement account (RA). The retirement account consist of funds from CPF-OA and CPF-SA.

B. CPF-SA is more stringent in their investment criteria. However, if you're talking about CPF Life, there will be no more CPF-SA. Upon reaching 55, CPF will reserve your minimum sum amount from both your CPF-SA and CPF-OA, and create a new account for it called retirement account (RA).

CPF Life will be funded by this RA. The amount varies, depending on your plan. Note that all the money you have left in your CPF-RA account (minus the amount deducted for CPF-Life) will be left to your family. The only difference is the amount in CPF-Life.

If you choose the refund plan, the amount you put in to CPF Life, minus the amount paid to you, will be left to your family. One thing to note is that for Refund/NoRefund 65, 100% of your MS will be in CPF-Life. Therefore, if you choose NoRefund 65, your family will not get a single cent.

C.Medishield and Medisave are quite different from each other. Medisave is an account, medishield is a basic insurance.

If you do have medishield, or private shield plans, the shield plan will pay the hospital, minus deductibles and co-insurance. The rest will be paid out of medisave. If you do not have sufficient funds in medisave, then you have to pay by cash.

CPF-Life does not touch Medisave accounts.

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