Generally speaking, annuity products can be categorised as follows:
1. In terms of when the annuity income starts:
Immediate annuity: The annuitant will start receiving annuity income once the premium has been paid up in a lump sum.
Deferred annuity: The annuitant contributes and accumulates capital to build up an income stream for retirement. The insurance company invests the capital during the accumulation period and starts to pay the annuitant after a certain period of time, or at a specified age of the annuitant.
2. In terms of how long the annuity income lasts:
Life annuity: Lifelong annuity income. Different insurance companies may define "lifelong" differently. Certain companies define "lifelong" as paying the annuitant up to their 100th birthday. Other insurance companies may pay until the death of the annuitant.
Annuity certain: Refers to receiving annuity income over a specified period of time, e.g. 10 or 20 years.
For example, the public annuity scheme “HKMC Annuity Plan” spearheaded by the government, is an "immediate, life annuity" product that offers monthly guaranteed annuity income for policyholders as long as they live.
Annuity plans offered by private insurance companies, on the other hand, are mostly in the form of a "deferred annuity certain", while some insurance companies also offer life annuities. Consumers should note that the annuity income from annuities offered by private sector usually comprise of both "guaranteed" and "non-guaranteed" income. As indicated by its name, the "non-guaranteed" part is not guaranteed.
Immediate vs. deferred
An immediate annuity is usually more suitable for retirees, as they usually have accumulated a lump sum of money but have no income. They can consider using part of their savings to purchase an immediate annuity plan to start receiving a steady stream of income to help paying for their daily expenses.
A deferred annuity is more suitable for those who are still working. Most of the deferred annuity plans are regular premium payment plans, e.g. paid for 5 years, 10 years or even longer, such that the policyholder can accumulate capital by saving regularly. At the time of retirement, the accumulated capital will be converted into a steady stream of annuity income to support a person's post-retirement life. They can also receive tax deductions on deferred annuities. This is designed to encourage the public to start saving and plan for their retirement early.
Life vs. certain
In selecting the period of annuity income, consumers should first understand one basic concept: in theory, for the same amount of premium, the longer the income period, the smaller the amount of each payout. On the other hand, the shorter the income period, the bigger the amount of each payout.
The choice between life annuity versus annuity certain should depend on one’s personal needs and circumstances. However, as discussed in the article “Should I buy an annuity plan”, the main purpose of an annuity is to hedge against the financial risks brought about by longevity. If this is the objective, consumers should select a life annuity plan or an annuity certain plan with a long income period. Certainly, consumers can also select a plan with a suitable length of income period according to their specific needs.
21 December 2018