CPF LIFE: Lifeline of Elderly Singaporeans?

Lately, I have been demystifying annuities through the series of articles published in recent past. But this series, focussing on annuities for Singaporeans, cannot be complete unless we talk about CPF LIFE — a life annuity scheme backed by the Singapore Government for Singapore Citizens and Permanent Residents.

CPF Lifelong Income For The Elderly (CPF LIFE) is essentially a Deferred Annuity with a capital guarantee. Deferred Annuity, as we discussed earlier, has two phases; accumulation and income. During the accumulation phase, the corpus gets built which is eventually used to payout lifelong income during the income phase. The income phase starts at the age the of retirement. The capital guarantee feature of CPF LIFE ensures that you and your survivors combined together get at least 100% of your money back. We will delve deeper into this feature in a bit but for now let’s find out the options CPF LIFE offers.

CPF LIFE, in turn, has following three plans. While all the three are deferred annuities with capital guarantees, each of them serves a specific purpose.

· Standard Plan: suited to individuals who would prefer higher income over legacy for the survivors.

· Basic Plan: works well for individuals who would want to leave larger proportion of their savings to their heirs and be content with relatively lesser income when compared to the Standard Plan

· Escalating Plan: it starts with a lower income but the income increases each year at the pre-determined rate. The currently prevailing rate is 2% per annum.

Now that we have a flavour for the three plans, the following graph would make more sense and help in making our understanding concrete. The graph is drawn assuming the fund used to buy annuities is same for all the three plans.

To clarify, even though the graph shows payouts till the age 95 the income continues for the entire lifetime. While the graph above explains the income patterns for the three plans, the one below highlights the capital guarantee i.e. legacy left in case of early demise of the annuitant.

The capital guarantee, as we can appreciate now better, ensures that the combined income from CPF LIFE ensures at least 100% of the funds is returned to the annuitant. Bequests reduces with time and reduces to zero when the total payout (in the form of income from annuities) exceeds the fund used to buy the annuity.

Clearly, CPF LIFE is a great product and goes a long way in ensuring a secured life post-retirement of Singaporeans. The product also has an option to defer the income phase, which in turn is rewarded in the form of higher income. But does that mean CPF LIFE is the panacea for retirement planning? Let’s find out!

The primary aim of any retirement product is to ensure a similar standard of living pre and post retirement. CPF LIFE meets this requirement. But not for everyone. CPF LIFE has an upper cap on the amount that can be annuitized, which implies that the monthly income from CPF LIFE cannot exceed a certain amount. This amount, currently, is in the range of SGD 2000 monthly. And it may not be sufficient for everyone! A solution to this simple problem could be buying another annuity plan to supplement the income from CPF LIFE thus ensuring a comfortable life in golden years too!

All in all, CPF LIFE is indeed a lifeline for the elderly in Singapore and is a fantastic product for income post retirement. However, some may need to buy additional products to supplement the income to maintain their lifestyle.

This article, I sincerely hope, helped in understanding CPF LIFE from the product features perspective. For further details, especially for information on eligibility and other administrative details, I would recommend you to visit the official website of CPF LIFE.

Before I go, let me remind you about the upcoming session of #AskTheActuary. The session is scheduled for an hour starting 8 PM Singapore Time on 21st January. This special session also brings an opportunity to win 1000 FDX. All you need to do is tweet your question to the Twitter handle of fidentiaX and add the hashtag #AskTheActuary. As always, you are also welcome to send your queries on our email id hello@fidentiaX!

Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.

About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.