Q I PLAN to save $200,000 for my retirement by the age of 55. Then, I plan to use that sum to buy an annuity which I believe will offer an approximate payout of $800 per month from age 62 onwards.

To me, this is a huge sum. Do you think the risk is higher if I use the money to buy an annuity from one insurer rather than splitting it into two to buy from two different insurers?

A CURRENT annuity rates can provide a life annuity payout from age 62 of $1,000-plus a month for a lump sum consideration of $200,000 at age 55.

Annuity rates fluctuate over time, and are typically fixed at the time of purchase, except for variable life annuity plans which generally pay a lower monthly payout in the initial years, with increasing monthly payouts depending on the performance of the insurance company's investments.

Historically, annuity rates and corresponding monthly payouts have ranged from over $2,000 (for the same $200,000 lump sum) in the early 1980s when interest rates were at historical highs, to the current rates which are hovering almost at historical lows.

Assuming that the financial rating and strength of the two different insurers are similar, the risk of purchasing the annuity is primarily the financial ability of the insurer to fulfil its annuity payout obligation in the future, since the annuity payout is fixed (except in variable annuities) by contract at the time of purchase.

To the best of my knowledge, in Singapore, no insurance company has ever failed to honour its legal annuity payout obligation.

Actually, the main risk of putting all your retirement funds into annuities is inflation risk.

If inflation in the future is very high, the real value of your monthly annuity payout may become diminished over time.

For example, at Singapore's historical inflation rate of about 1.5 per cent over the last 20 years or so, the value of a fixed annuity payout will halve after every 48 years. If inflation is 5 per cent, purchasing power will half every 14.4 years.

Thus, you may like to consider diversifying some of your retirement funds into a globally diversified portfolio of say equities, commodities and bonds, as a relatively better inflation hedge.

Leong Sze Hian
President
Society of Financial Service Professionals

Advice provided in this column is not meant as a substitute for comprehensive professional advice. E-mail questions to a1admin@sph.com.sg.

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