Monday, 19 March 2012

Picking CPF Life plan: It's a piece of cake

It depends on whether you want bigger payout and smaller bequest or the other way round
By Magdalen Ng, The Straits Times, 18 Mar 2012

We are all living longer, which is generally a good thing if we are able to look forward to fairly good health.

But worry and penny-pinching loom for those who fail to set aside enough for a decent nest egg that allows them to live in the manner they are accustomed to.

And who needs that in their twilight years? Much better to enjoy the grandchildren, if they are on the scene, and get to read as many good books as possible.

Not to mention the occasional trip away, if the budget allows.

For those looking ahead to retirement, it is worth noting some fairly important changes to a national scheme designed to ensure people have enough regular income to get by comfortably.

This involves an annuity scheme, which is when you invest a sizeable sum upfront, and then down the track you get regular payments to cover your expenses.

The scheme - called Central Provident Fund (CPF) Life - was introduced as an alternative to the CPF Minimum Sum Scheme, which provides monthly payouts for only about 20 years.

That is all very well of course, if one lives fewer than those 20 years while receiving annuity payments. But it is no fun if you have the good fortune to live even longer - and then have to face a cash crunch.

Of course, if you have children they would probably jump in and help but that is not always the case.

CPF Life was devised to provide Singaporeans with a retirement income for life - a worthy goal but not that easy to pull off, given varying savings rates and differing lifestyle choices.

As Singaporeans live longer, on average, a growing proportion of retirees will outlive their CPF savings if they stay on the Minimum Sum Scheme, Finance Minister Tharman Shanmugaratnam said in the recent Budget debate.

About half of Singaporeans aged 65 today are expected to outlive the 20-year period. One-third will live beyond 90 - a proportion set to grow.

While the CPF Life scheme is seen as the right vehicle to tackle the need for adequate nest eggs, public feedback suggests that some people struggle to understand their options and to make the right choices, noted Mr Tharman.

The changes are aimed at simplifying the programme and to make it more effective ahead of Jan 1, when the scheme will become compulsory for people reaching 55.

The scheme, first announced in 2009, is compulsory for those born in 1958 or later. So the first batch of those automatically placed in the scheme will turn 55 next year.

CPF members born in 1957 or earlier were given the option to join, or stay on the Minimum Sum Scheme.

CPF Life has four plans - Balanced, Plus, Basic and Income. These offer various combinations of two key elements that have to be weighed when choosing your policy - monthly payouts and refund amounts upon death or withdrawal from the scheme.

If a person opts for higher monthly payouts, then not surprisingly, there will less left over when they die.

But changes announced on March 5 mean that from Jan 1, there will be just two plans - Standard, a new plan, and the existing Basic.

The Standard plan gives bigger monthly payouts but leaves less as a bequest. The existing Basic plan provides smaller monthly payouts and a larger bequest.

Less than 3 per cent of CPF members who opted into CPF Life chose the Income plan, which gives the highest monthly payout but no bequest. Its low level of participation has led to it being scrapped.

For members born in 1957 or earlier - or those who have a choice to opt into CPF Life, the four existing plans are available until the end of the year. The new Standard plan will also be an option for them.

Civil engineer Tan Yew Meng, 56, can choose to opt into the CPF Life scheme or remain on the Minimum Sum Scheme. He has yet to decide because he wants to research the four plans first.

He said: 'I think I will probably choose the Standard plan. It's either leave more money for children, or leave less. I might as well get more money, and if I don't have the need for it, I can save.

'As they say, a bird in hand is better than two in the bush, right?'

People turning 55 next year and after will have only the new Standard and existing Basic plans to choose from.

The Standard plan combines features of the existing Plus and Balanced plans and its monthly payouts will be higher than the Basic plan's, which leaves a bigger bequest for the member's family.

CPF Life will start to figure more prominently in the financial landscape from Jan 1 when it becomes compulsory for people turning 55 next year - about 58,000, according to the CPF Board.

Mrs Tan Khuen Eoi, 53, will be automatically included in the scheme if she has sufficient money in her Retirement Account. She will likely opt for the Standard plan if she has a choice.

The housewife, who is a former teacher, said: 'I don't want to burden my children so much.'

Here is a look at how the CPF Life scheme works.

Q: Am I included in the CPF Life scheme?

You will automatically become a member if you turn 55 from Jan 1 next year and if the amount in your CPF account meets the minimum sum requirements.

You should have at least $40,000 in your Retirement Account at age 55 or at least $60,000 at the age when you are to start receiving payouts.

Those who do not meet the balance requirement will remain on the Minimum Sum Scheme. But this group can choose to join the CPF Life scheme at any time between the ages of 55 and 80.

A month after you turn 55, you will be informed if you are on the scheme. You will then have to elect your preferred plan.

Q: When will the monthly payouts start?

If you join CPF Life before your drawdown age (DDA), you will receive monthly payouts from that age. For those born:

In 1943 or earlier: DDA is 60

- 1944 to 1949: 62

- 1950 or 1951: 63

- 1952 or 1954: 64

- 1954 or later: 65

If you join the scheme after your DDA, you will receive the monthly payout from the following month.

Q: What plans are available?

For those who are planning to join CPF Life before Jan 1 next year, the four plans are still available.

For others who join from next year, the options are the Standard and Basic plans.

You will get up to six months to choose your preferred plan. If you do not make a choice during this period, you will be automatically placed under the default Standard plan.

Q: What is the best plan for me? (see Tables A and B)

An Aviva spokesman said any form of retirement planning is definitely dependent on the desired standard of living in retirement.

'While there is no hard and fast rule that determines exactly how much is needed, Singaporeans should look at factors including the age of retirement, lifestyle, outstanding loans or financial commitments, and whether they will have additional sources of income from other investment returns.'

Another consideration would be how much you would like to leave to your beneficiaries. If you would like to leave more money to them, your monthly payout will be smaller.

*Basic: This plan has the lowest payouts but leaves the most for your beneficiaries. It may suit people with substantial savings outside of CPF.

Balanced: This provides a balance between a reasonable level of retirement income and some bequest amount if they die early.

Plus: With higher monthly payouts, the Life Plus plan leaves the least amount for beneficiaries. For those who have bigger monthly expenses, such as medical bills, this plan may be suitable.

Income: This gives the highest monthly payouts, but leaves no bequest when the member dies.

*Standard: This combines the more popular features of the Balanced and Plus plans. It allows members to enjoy higher payouts than the Balanced plan, while retaining the flexibility for members to use their Retirement Account balances before their DDA.

*These will be the only two plans available from next January.

Q: What will the monthly payout be? (see Table C)

This depends on how much you have in your Retirement Account, and which plan you choose. There is no minimum amount required, but members with lower balances will get lower payouts.

If you want higher payouts, you can make cash or CPF top-ups to your Retirement Account, up to the prevailing minimum sum.

Monthly payouts are not fixed and may be adjusted every year, depending on factors such as CPF interest rates and mortality experience. However, the adjustments will usually be small so that the payouts are stable.

CPF returns have been at 2.2 per cent a year - on top of inflation - over the past 20 years.

Q: Can I change plans midway?

Generally no. Changing your plan will affect other members who are already on the scheme.

However, there is an exception being made for existing members to allow for a switch to the new Standard plan, which was not available previously.

The switch has to be made before Dec 31.

Existing CPF Life policyholders can choose not to change their plans.

Q: Can I withdraw from the scheme?

You may not withdraw unless you are suffering from an illness that renders you permanently unfit for employment.

Another exception is if you are leaving Singapore and West Malaysia permanently and do not intend to return.

CPF Life lets retirees enjoy longevity without worry

Annuity scheme ensures steady stream of lifelong income

By Christopher Tan, The Straits Times, 18 Mar 2012

There are two big financial concerns in our lives: dying too soon and living too long. In the former, if you have dependants, they may lose your income and life can be difficult for them. In the latter, you may run out of money before you die and life can be tough for you. Many may not realise that the amount we need during retirement is huge.

For a couple who are retiring today and would like to live on $3,000 per month (not a luxurious lifestyle really) for 20 retiring years, they will need at least $720,000 now. This is even before considering inflation. And if you are intending to retire at age 65, in 20 years' time, the amount you need would be a whopping $1.3 million then.

The question is, how many average Singaporeans can accumulate this kind of money? The need for this amount of money will be lower if you invest during your retirement. But what if the financial markets go down during your retirement? And what if you live for more than 20 years?

One of the biggest problems in retirement planning in Singapore is that the financial advisory industry focuses a lot on accumulation towards retirement but there is not enough thinking on the drawing down part. There are also more products for growing your wealth but relatively fewer ones to help you consume what you have accumulated. Many may not realise that retirement planning is actually less about savings and investments; it is really more about cash flow management to maintain a lifestyle, when you no longer have an income and still face many uncertainties in those long retiring years.

In 2009, the Central Provident Fund Board introduced CPF Life, with the realisation that Singaporeans will live longer, beyond age 85. CPF Life is the national annuity plan that provides lifelong income throughout retirement.

From next January, it will be reduced to two plans from the current four. At age 55, after setting aside monies up to the minimum sum in your Retirement Account, you can choose one of the two plans: Basic or Standard.

If you choose the Basic plan, you will have a lower monthly payout but a higher bequest (in the event of death) relative to the Standard plan. The difference in payouts between the two plans is about 10 per cent.

At your drawdown age of 65, you will begin to draw down a monthly amount for life. Based on the current minimum sum of $131,000, and depending on the plan you choose, you will receive about $1,000 or more per month. If both you and your spouse set aside the full minimum sum, you will receive more than $2,000 per month for life. This is two-thirds of the amount I have illustrated above, and for life.

With CPF Life, Singaporeans can have more certainty in their retirement. They no longer need to fear living too long. Their retirement will be less dependent on market upheaval. Best of it all, this 'product' is low in expense due to the fact that you need not pay any commissions to salespeople. And because it is compulsory, almost the entire nation at age 55 will be on this plan. These mean greater economies of scale.

After Chinese New Year this year, my wife took a portion of my children's red packet money and deposited it into the bank. Obviously, my children weren't very happy. To them, it was their money, why did their mummy force them to save a portion of it? To us as parents, we know the answer. We do it because we know that some time in their future, the kids will be glad that we did not allow them to spend it all now.

The Minimum Sum Scheme and CPF Life have the same intention. Although we may not like it. Although we feel that it has robbed us of our freedom. Not too long in the future, we will realise that it was a good decision, when we have a lifestyle, a dignified retirement regardless of how old we live till and how the financial world may be. As a financial adviser, I will definitely incorporate CPF Life into my planning for my client's retirement. It is not only wise, but also right.

Christopher Tan is the CEO of Providend Ltd, a fee-only independent financial adviser and investment manager.

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