Should I buy an annuity plan?

Retirement planning

Hong Kong is one of the longest life expectancy regions in the world. The average life expectancy of men is 81.7, and women live up to 87.7 (Source: 2017 global life expectancy study of the Japan’s Ministry of Health, Labour and Welfare). With advanced medical technologies and healthcare, life expectancy continues to rise. As people live longer, whether their retirement savings are sufficient to support their life is an important question to consider.


You may live longer than you think. How do you afford it?

An annuity is a long-term insurance product designed to address the financial risks brought about by longevity. Unlike life insurance, which is designed mainly to protect the risk of premature death, annuities aim to address the financial risks brought about by longevity, or outliving one's savings/assets. Let's look at an example:

Mr Wong is 60 and he has a savings of $ 1 million in the bank. Assuming the interest p.a. is 1%, he will use up his savings after 18 years (when he turns 78) if he spends $5,800 every month. How could Mr Wong cope with his living expenses after age 78?

Instead, if he places the same amount into the “HKMC Annuity Plan”, he would receive a lifelong guaranteed monthly income of $5,100, and he would not have to worry even if he lives beyond 100 years old. However, consumers should note that there are different types of annuity products in the market and if the income period is too short, it may not be able to achieve the objective of addressing the financial risks brought about by longevity.

Note: The above example is quoted to illustrate how an annuity can address the financial risks brought about by longevity. Before purchasing an annuity plan, a consumer must ensure that sufficient money is set aside for his daily expenses and contingency purposes. Do not use all of your money to purchase annuities.

A simple way to manage your retirement reserve that offers peace of mind

Shifting from work to retirement is a major change in the life for everyone. Some people just retired may not be able to adapt to their new lifestyle immediately and might spend more money on entertainment and recreation to kill time. This could significantly reduce their retirement savings. The benefit of an annuity is to convert money into a steady stream of income over the long term, which can help retirees spend their retirement savings in a disciplined way, without blowing away all their money. Additionally, purchasing an annuity only requires a simple and one-off procedure that the annuitant does not need to spend much time on managing it in the future, which makes it a simple financial arrangement for retirement that offers peace of mind. This is particularly important for the elderly in their later stages of life, especially for those who are not good at financial management.

You can’t have your cake and eat it

While annuities bring lots of benefit, there are certain risks or key points to note:

Capital flexibility: 

As an annuity is a long-term insurance product, early surrender or termination could incur financial loss. The surrender or termination value may be much less than the total premiums paid. Before purchasing an annuity plan, consumers should consider their liquidity needs and ensure that they can afford to pay for the whole premium payment term. Sufficient cash should also be set aside to pay for daily and contingency expenses.

Inflation risk:  An annuity is a long-term insurance product. A rise in the inflation rate could reduce the purchasing power of the money you receive.
Credit risk of insurance companies:

Annuity products offered by insurance companies could span across decades. If an insurance company fails to satisfy its financial obligations, you may not get back the premiums you paid and suffer losses.

Asset inheritance:

Many of the elderly want to leave their assets behind as part of their estate. However, there is usually no remaining value left after the end of the income period or guaranteed period of an annuity. If you want to leave an inheritance behind for your descendants, you should make other plans aside from annuities.

An annuity as part of a retirement management portfolio

Different financial products come with different functions and characteristics in terms of risks and returns. For example, while the potential return of stocks is high, so is the risk. Bank deposits are low-risk and offer high flexibility, but the return is usually outweighed by inflation. Annuities are not growth-oriented, nor are they flexible. It serves to help retirees spend their retirement savings in a disciplined way and address the financial risks brought about by longevity. Consumers can consider making use of different complementary financial products to build a retirement portfolio that suits their needs and to address their retirement management objectives.


21 December 2018