Financial Freedom SG

One of the ways to fund a retirement is through buying an annuity. What is annuity? A way to think of it is that it is a reverse of of your insurance plan that you bought before retirement. In an insurance plan that you buy, you pay a fixed sum of money either monthly or annually to the insurance company to insure yourself of some of the risks in life. This insurance policy will have a maturity date and even a lump sum at the end, depending on the type of insurance that you buy.

In an annuity, the reverse is true. Here, the insurance company or financial company pays you a fixed sum of money, normally monthly to you. This is in exchange for a lump sum payment by you to buy the annuity from the insurance company.

There are a few types of annuities that you can buy:

1. Fixed income annunity- This type of annuity pays a fixed income each month with the first payment normally at a few years later, so you should consider buying an annuity before you retire or just when you retire, with the savings you have tiding you over until you hit retirement age.

2. Increasing income annunity- If you feel that inflation is going to be high, you may want to get this type of annuity where the sum of money paid out to you increases over years. The disadvantage of this is that the starting monthly payment are much less than what you get for level income annuity.

3. Investment participating annuity- For the people who are less risk adverse, this type of investment annuity could offer the benefits of an increased payment in future years as the funds are invested back into investment products. This type of annuity usually have a small fixed amount that is paid out and the rest depends on the insurance company's performance in the market.

The core difference in Singapore's context is that there are two broad class of annunity- one is fixed forever (sometimes called a perpetuity) where the annuity pays out the fixed sum until the day you die or if you live till 120 years old, the insurance company will pay you till then. The other is an annuity that will draw down your investment amount until it is exhausted.

The key to annuity is that you have to buy it just before you retire, once you hit the maximum age of 60 years old, no insurance company may want to let you buy annuities from them. You can take a look at the CPF page to understand more about the different types of schemes available to you upon retirement.