Emotional barriers to retirement adequacy

Emotional barriers to retirement adequacy

When it was announced that four-room public flat owners will be able to sell part of their lease back to the Government for retirement income, property experts praised the move yet did not expect a large impact.

The Lease Buyback Scheme's take-up has been muted since its introduction in 2009, when it was restricted to three-room and smaller flats.

It allows Housing Board flat owners to retain 30 years of their lease and sell the rest back to the Housing Board.

The Housing Board's worked example is for a flat with a remaining lease of 70 years and a market value of $323,000. It will buy 40 years of the lease at $138,000. This figure is derived by accounting for depreciation over time.

The owners use the proceeds to top up their Central Provident Fund Retirement Accounts to a required level, set at the Minimum Sum for those aged 70 and younger, and slightly less for older flat owners. This allows them to have higher payouts under the CPF Life annuity scheme. The remaining money from the Housing Board is given to the couple as cash.

So assuming that the couple make top-ups of $121,000 in total to their CPF Retirement Accounts, they will get $17,000 in cash. They will also get more per month in annuity payouts from CPF Life. As of last month, just under 800 households have taken part in the Lease Buyback Scheme. That's a tiny number, considering about 42,000 owners of three- and two-room flats who meet the age and other criteria are eligible. There are over 230,000 sold three- and two-room flats.

The scheme's expansion to four-room flats will likely generate just moderate interest, said experts.

Good reasons for poor response

Should the Government be worried about the limited take-up rate for an apparently worthwhile scheme? In this case, not necessarily.

First, some flat owners could simply be uninterested because they do not need the money, as ERA Realty key executive officer Eugene Lim observed.

The significance of the scheme's expansion is that more flat owners will "have this additional monetisation option to tap on should they have a need" - but of course, not everyone might have such a need.

For others, it might simply not be an option. For instance, flat owners living with their grown children may decide not to take up the scheme so that their children can continue living there, said SLP International Property Consultants head of research Nicholas Mak.

Second, the scheme is meant as one option among many, not a new default. A low take-up rate could simply indicate that other options are more attractive.

Another way to derive income from one's flat is to sublet either a room or the entire unit. About one in 10 flat owners aged above 55 does so.

Alternatively, owners could sell their flat and move to a smaller one. In the last three years, 5,600 elderly households have bought studio apartments, some of whom would have done so after selling their old flat.

Such older flat owners are not losing out by not taking part in the Lease Buyback Scheme. They have simply found other options.

National Development Minister Khaw Boon Wan had a similar take on the situation. When asked in February, he said: "I do not regard the low take-up rate as a failure. I would just say that what it means is, people are not financially desperate to need to take advantage of those options."

Property experts agree. Said OrangeTee head of research Christine Li: "I don't think we should worry too much about the low take-up rate because after all, there are many other ways to unlock the value of our Housing Board flats which are more flexible."

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