Singaporeans aged 50 and younger who pay CPF will come under the new annuities scheme that starts in 2013. When they turn 55, they will be asked to opt for one out of 12 payout options. Lorna Tan scrutinises the choices available.

SINGAPOREANS are now assured of a lifelong income, thanks to the Government's new annuity scheme.

While the scheme is widely viewed as an improvement on what is currently available, many will agree that the devil is in the details. This is because some Singaporeans are just getting acquainted with what an annuity is and how it works.

In a nutshell, an annuity entails the payment of a lump sum to an insurer and thereafter, enjoying a monthly income for as long as you live.

Last Tuesday, working adults who contribute to the Central Provident Fund (CPF) and are 50 this year and below were told that their CPF Minimum Sum will go towards paying for an annuity, and that they will have 12 payment options when they hit 55.

The number can be mind-boggling for many people. Also, they must know that once they make their choice, they are not allowed to reverse the decision should they change their minds later on. This is because, like all insurance plans, the scheme works on certain risk assumptions.

The 12 options

THE options are part of the National Lifelong Income Scheme or CPF Life.

There are six choices on when the payouts can begin and they are ages 65, 70, 75, 80, 85 and 90. For each choice, Singaporeans can decide if they want to leave any unused payouts to their beneficiaries upon death.

The options are thus classified as refundable and non-refundable plans.

Mr Tony Ong, director of IPP Financial Advisers, said that Singaporeans are likely to look at two aspects when deciding which plan is best. They are the maximum monthly payout that they can receive while they are alive, and the maximum amount they can leave for their beneficiaries.

He added that those who choose refundable plans are likely to want the best of both worlds, where they can get lifelong income and yet leave behind something for their dependants.

Rather than throw a dice to decide your fate, here are some scenarios you may want to mull over.

No-refund 65

THIS plan is likely to appeal most to a CPF member who has no dependants or who does not place any priority on giving savings to any beneficiary.

It will also appeal to those who are so financially strapped that they need the higher payout, regardless whether they have dependants or not.

The Government has estimated that about 10 per cent of a cohort will likely opt for this plan.

By choosing this plan, the CPF member gets the highest possible monthly payout out of the 12 options.

Let's use the example of Mr Tan, 50, who turns 55 in 2013. By then he is estimated to have $67,000 in cash in his CPF Minimum Sum, which is half of the full Minimum Sum of $134,000.

By opting for the No-refund 65 plan, his monthly payout, which starts from age 65, is $690.

Refund 65

IPP Financial Advisers' Mr Ong believes that the preferred choice of most Singaporeans with dependants will be the refundable option with payouts starting from age 65.

'The preferred choice will be Refund 65 as it meets the primary objective of having higher monthly income for life. The refund option fulfils the secondary objective of leaving something behind for the beneficiaries.'

Using the example of Mr Tan, he will receive a monthly payout of $650 from age 65 if he opts for this plan.

The payouts under Refund 65 is the highest among the refundable plans. This is why Mr Leong Sze Hian, president of the Society of Financial Service Professionals, believes that if the expectation that most Singaporeans will live longer is right, then this option will be a popular choice. Even if one is not sure of his life expectancy, a higher liquidity is always preferred.

However, he cautioned that if Mr Tan dies just before 65, then his beneficiaries will receive only $67,000. This is because 100 per cent of his Minimum Sum is allocated as premiums to pay for the annuity scheme.

This is much lower than the projected $106,608 refund for his beneficiaries if Mr Tan had opted for Refund 90. In the latter plan, a much lower 6 per cent of the Minimum Sum is allocated in the annuity scheme.

The projected refund was worked out by Mr Leong based on 94 per cent of the Minimum Sum of $67,000, or $62,980 earning 5 per cent interest compounded for 10 years. This amounts to $102,588 plus the refundable premium of $4,020.

It is not possible to know when one will die, so Ms Marion Chin, vice-president at ipac financial planning, suggested using one's family tree as a yardstick. Check with your family members and find out if an illness is known to be hereditary within the family. Are your grandparents still alive and well, in their 80s or even 90s?

Refund 70 - Refund 85

THE other refundable plans of Refund 70, Refund 75, Refund 80 and Refund 85 will appeal to those who are willing to receive lower monthly payouts.

The monthly payouts for these plans are lower than that of Refund 65. This is a trade-off for paying lower premiums into the annuity scheme and as their annuity payouts start later, their beneficiaries can expect to receive more upon their death.

This is partly the reason that Refund 80 is the default option should CPF members fail to choose a plan when they turn 55.

Still, Alpha Financial Advisers chief executive Arthur Lim highlighted that the new annuity scheme 'is not meant as a legacy tool for beneficiaries'.

Despite Singaporeans' Asian values, which see them wishing to leave something behind for the next generation, there are many who may not even have enough for their old age and are not in the position of bequeathing anything to their dependants.

'The circumstances surrounding the choice for refundable plans should essentially be one's ability to ensure a predictable regular monthly income after considering one's other retirement income streams, if any... This is because there may not be much left from this scheme to bequeath,' Mr Lim said.

Refund 90

THOSE who want to leave the most behind for their beneficiaries may want to consider Refund 90.

However, this option is not expected to be popular because Singaporeans may not expect to live that long.

CPF Life 'not enough'

DO NOT be lulled into a false sense of security that the monthly payouts from CPF Life are sufficient for your retirement. After all, the scheme is not meant to provide for all the retirement needs of Singaporeans.

It is also likely that the monthly payouts may not keep pace with inflation.

Financial experts say that each individual should know how much he will need on retirement to maintain his desired standard of living.

CPF Life should be looked upon as one possible stream of income. To plug the gap, Singaporeans are encouraged to consider other sources at retirement such as savings, dividends from equities, insurance, etc.