SUPPLEMENTARY NOTES Risk Management, Insurance And Retirement Planning (2 nd Edition, June 2012) Date Of Issue : 9 January 2015 The following amendments have NOT been incorporated in the study text. They should be marked up in your study text immediately. For examination purposes, the following amendments will take effect from 9 March 2015: 1. Table of Contents, Page v to vi To replace the chapter and section titles with the following: Chapter 9 Retirement Funding Chapter Outline 1. Introduction 2. The Central Provident Fund (CPF) 3. The Minimum Sum Scheme (MSS) 3.1 Topping Up The Minimum Sum (MS) 3.2 Deferring Withdrawal Of CPF Funds At Age Of 55 Years 3.3 Increase In Draw Down Age (DDA) 4. Medisave Minimum Sum (MMS) 5. Case Studies Withdrawal From CPF At Age Of 55 Years 6. Central Provident Fund Investment Scheme (CPFIS) 7. The Supplementary Retirement Scheme (SRS) 8. Insurance 8.1 What Are Annuities? 8.2 How Do Annuities Work? 8.3 Benefits & Limitations Of Annuity Policy 8.4 CPF LIFE Scheme 9. Savings And Investments 9.1 Cash & Cash Equivalents 9.2 Shares 9.3 Derivatives 9.4 Bonds 9.5 Unit Trusts 9.6 Real Estate Investments 9.7 Structured Products 10. How To Help Clients To Overcome Inadequate Retirement Resources 10.1 Reverse Mortgage (RM) 10.2 Lease Buyback Scheme (LBS) 10.3 Right Sizing 10.4 Selling The Flat 10.5 Renting Out Part Of The Flat 10.6 Maintenance Of Parents 10.7 Post-retirement Employment 11. Case Study How Mr Tan Can Overcome Inadequate Retirement Resources Appendix 9A Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg 1
Appendix 9B 2. Chapter 9, Page 211 to 232 To replace the entire chapter with Annex 1 of this Supplementary Notes. Date of Issue: 4 August 2014 For examination purposes, the following amendments took effect from 4 October 2014: 1. Chapter 9, Section 3, Page 212 213 To replace the entire section with the following: 3. The Minimum Sum Scheme (MSS) 1 The MSS (started on 1 January 1987) is a scheme which aims to help CPF members set aside sufficient savings to support a modest standard of living during retirement. For more information on the MSS, please refer to the CPF website at: www.cpf.gov.sg Upon reaching the age of 55 years, the member can use his Minimum Sum to do the following: Birth Year What The Member Can Do 1957 and earlier He can apply to join CPF LIFE any time up till one month before he turns 80 years of age; or He can remain on the MS Scheme. 1958 and later If he has at least S$40,000 in his Retirement Account (RA) at the age of 55 years or at least S$60,000 in his RA at the age of 65 years, he will be placed on CPF LIFE. If he has less than S$40,000 in his RA at the age of 55 years or less than S$60,000 in his RA at the age of 65 years, he can apply to join CPF LIFE or remain on the MS Scheme. CPF members who turn 55 years of age between 1 July 2014 and 30 June 2015 will need to set aside a Minimum Sum (MS) of S$155,000 in their Retirement Account. The MS for 2013 was S$148,000. The MS was set at S$80,000 in 2003 and will be raised gradually until it reaches S$120,000 (in 2003 dollars) in 2015. The MS is adjusted yearly for inflation. Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg 2
Under the MSS, members may apply to receive his MS monthly payment when he reaches his drawdown age (DDA). Please see table below: Year of Birth Drawdown Age of 1943 and before 60 years 1944 to 1949 62 years 1950 and 1951 63 years 1952 and 1953 64 years 1954 and after 65 years Source: CPF website Participating in CPF LIFE is a better choice than remaining on the MSS because the monthly payment will continue for as long as the annuitant (CPF member) is alive. Once the minimum sum is fully utilised, the monthly payment will be discontinued. For members who turn 55 years of age in or after 2013 and have at least S$40,000 or more in their Retirement Account, it is compulsory for them to use their Minimum Sum to participate in CPF LIFE. The Retirement Account is set up to meet the member s basic needs during the member s old age. When he reaches the age of 55 years, he will need to set aside his Minimum Sum, using the savings in his Special and Ordinary Accounts, in the Retirement Account. He can then withdraw the rest of the savings in his Ordinary and Special Accounts in one lump sum. The CPF interest rates are as follow: CPF Interest Rates 1 July 2014 to 30 September 2014 (Reviewed quarterly) Ordinary Account: 2.50% per annum Special & Medisave Accounts: 4.00% per annum CPF Interest Rates 1 January 2014 to 31 December 2014 (Reviewed Yearly) Retirement Account: 4.00% p.a. Interest rate for Ordinary Account (OA) monies is either a market-related interest rate, based on the 12-month fixed deposit and month-end savings rate of the major local banks, or the legislated minimum rate of 2.50% per annum, whichever is the higher. Interest rate for Special and Medisave Account (SMA) is either the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, or 4% per annum, whichever is the higher, adjusted quarterly. Interest rate for Retirement Account (RA) monies is either the 12-month average yield of the 10YSGS plus 1% at the point of issuance, or 4% per annum, whichever is the higher, adjusted yearly. Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg 3
As part of the Government s efforts to enhance the retirement savings of CPF members, an additional 1% per annum will be paid on the first S$60,000 of a member s combined balances, with up to S$20,000 from the OA. This works out to be 3.5% per annum earned on the first S$20,000 in a member s OA, and 5% per annum earned on the first S$40,000 (up to S$60,000 if no OA savings) in a member s SMA and Retirement Account (RA). The additional interest received on the OA will go into the member s Special Account (SA) or RA, to enhance his retirement savings. If a member is above the age of 55 years and participates in the CPF LIFE scheme, the additional 1% per annum interest will still be earned on his combined balances, which will include the savings used for CPF LIFE. 1 Adapted from www.cpf.gov.sg 2. Chapter 9, Section 3.1, Page 213 3. Chapter 9, Section 5, Page 214 215 To add in the following paragraph after the 1 st paragraph: With the introduction of the CPF LIFE scheme, lower bank interest rates and more annuity products granted tax exemption, members participation in the MSPS has dropped significantly over the years. All participating insurers have also stopped accepting annuity purchases under the MSPS. The MSPS has thus become defunct and amendments will be made to the CPF Act (Cap. 36) to cease the MSPS with effect from 1 January 2014. Members who are already on the MSPS can continue to remain on their respective schemes. To replace the 1 st paragraph with the following: The SRS was introduced by the Government on 1 April 2001 as voluntary scheme to encourage working individuals to save for their retirement, over and above their CPF savings. The scheme is open to all working individuals who are at least 18 years of age. These include self-employed individuals and foreigners working in Singapore. SRS participants will enjoy a range of investment choices in financial assets (excluding real estate) approved by CPF. They can invest as often, as much or as little as they like through their SRS accounts, subject to a contribution cap. The contribution cap is determined by multiplying the appropriate SRS contribution rate by an absolute income base. The contribution rate for Singaporeans and Permanent Residents will be 15% of their income, in recognition of the fact that they have no access to the tax benefits afforded by the CPF scheme. The absolute income base, derived from 17 months of CPF monthly salary ceiling, is S$85,000 per annum from 2011 onwards. This amount is subject to change. Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg 4
4. Chapter 9, Section 5, Page 215 To replace the last sentence in the 2 nd paragraph with the following: A 5% penalty for premature withdrawal will also be imposed, unless it is made under exceptional circumstances. These circumstances are: death; medical grounds; bankruptcy; and the full withdrawal of the SRS balance by a foreigner who has maintained his SRS account for at least 10 years from the date of his first contribution. Date of Issue: 4 January 2013 For examination purposes, the following amendments took effect from 4 March 2013: 1. Chapter 5, Page 106, Section 2.1.2 2. Chapter 9, Page 222, Section 6.4.3 To add new sentence to the last paragraph on Page 106 as follows: With effect from 1 March 2013, there will be an increase in the Medisave withdrawal limits for MediShield and Integrated Shield Plans premiums from S$800 to S$1,000 (per insured person, per policy year) for those aged 76 to 80 years, and from S$1,150 to S$1,200 (per insured person, per policy year) for those above the age of 80 years. To add the following paragraphs after the last paragraph: The new Standard Plan combines the best features of the two most popular plans (Balanced and Plus Plans), and will be the default CPF LIFE plan. The new Standard Plan provides members with higher monthly payouts, while preserving flexibility in the use of their Retirement Account (RA) savings for housing prior to the age of 65 years. Members also leave a bequest for their beneficiaries under the new Standard Plan. The Basic Plan will be retained for members who prefer a higher bequest and lower monthly payouts. This plan also provides flexibility for members who wish to use their RA savings for housing after the age of 65 years. Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg 5
Annex 1 To Supplementary Notes Risk Management, Insurance And Retirement Planning, 2 nd Edition Date Of Issue: 9 January 2015 Singapore College of Insurance 9 Temasek Boulevard, #14-01/02/03, Suntec Tower Two, Singapore 038989 Tel: (65) 6221 2336 Fax: (65) 6220 6684 Website: www.scicollege.org.sg A1
9. Retirement Funding CHAPTER 9 RETIREMENT FUNDING Chapter Outline 1. Introduction 2. The Central Provident Fund (CPF) 3. The Minimum Sum Scheme (MSS) 3.1 Topping Up The Minimum Sum (MS) 3.2 Deferring Withdrawal Of CPF Funds At Age Of 55 Years 3.3 Increase In Draw Down Age (DDA) 4. Medisave Minimum Sum (MMS) 5. Case Studies Withdrawal From CPF At Age Of 55 Years 6. Central Provident Fund Investment Scheme (CPFIS) 7. Supplementary Retirement Scheme (SRS) 8. Insurance 8.1 What Are Annuities? 8.2 How Do Annuities Work? 8.3 Benefits & Limitations Of Annuity Policy 8.4 CPF LIFE Scheme 9. Savings And Investments 9.1 Cash & Cash Equivalents 9.2 Shares 9.3 Derivatives 9.4 Bonds 9.5 Unit Trusts 9.6 Real Estate Investments 9.7 Structured Products 10. How To Help Clients To Overcome Inadequate Retirement Resources 10.1 Reverse Mortgage (RM) 10.2 Lease Buyback Scheme (LBS) 10.3 Right Sizing 10.4 Selling The Flat 10.5 Renting Out Part Of The Flat 10.6 Maintenance Of Parents 10.7 Post-retirement Employment 11. Case Study How Mr Tan Can Overcome Inadequate Retirement Resources Appendix 9A Appendix 9B Learning Objectives After reading this chapter, you should be able to: Learn about the CPF and its related schemes Know how annuities work and its importance in retirement planning Understand the different kinds of savings and investments Recognise the help available to clients with inadequate retirement resources A2
Risk Management, Insurance And Retirement Planning 1. INTRODUCTION In this chapter, we will look at the various sources of funds that an individual may draw on for their retirement use, as well as how you can help your clients who do not have sufficient retirement resources, to overcome their problems. Let us begin with the Government Schemes followed by other sources of funds. 2. THE CENTRAL PROVIDENT FUND (CPF) The Central Provident Fund (CPF) started on 1 July 1955, as a national old age savings plan, with the simple objective of ensuring that every working individual in Singapore would have sufficient income to meet basic expenses during their retirement years. The CPF is administered by the Central Provident Fund Board (CPF Board), a statutory board under the Ministry of Manpower, in accordance with the Central Provident Fund Act (Cap. 36). Over time, as the Singapore s economy progressed, changes were made to the CPF system, to enable the CPF members to have adequate savings for their retirement. In September 2009, the CPF LIFE Scheme was introduced to realise the idea of having lifelong retirement income for the CPF members. The CPF has evolved into a comprehensive and unique social security savings system providing not only for retirement needs, but also for healthcare and housing needs of Singaporeans. Today, the CPF system in providing for the social security of Singaporeans comprehensively encompasses the five pillars of financial security retirement adequacy, home ownership, healthcare, family protection and asset enhancement. We will cover these pillars later in this chapter. 3. THE MINIMUM SUM SCHEME (MSS) 1 The Minimum Sum Scheme (MSS), started on 1 January 1987, aims to help the CPF members to set aside sufficient savings to support a modest standard of living during their retirement. For more information on the MSS, do refer to the CPF Website at: www.cpf.gov.sg Upon reaching the age of 55 years, the CPF member can use his Minimum Sum (MS) in the manner as described in the table below. Birth Year What The CPF Member Can Do 1957 and earlier He can apply to join the CPF LIFE Scheme any time up till one month before he turns 80 years of age; or He can remain on the MS Scheme. 1958 and later If he has at least S$40,000 in his Retirement Account (RA) at the age of 55 years or at least S$60,000 in his RA at the age of 65 years, he will be placed on the CPF LIFE Scheme. If he has less than S$40,000 in his RA at the age of 55 years or less than S$60,000 in his RA at the age of 65 years, he can apply to join the CPF LIFE Scheme or remain on the MS Scheme. 1 Adapted from www.cpf.gov.sg A3
9. Retirement Funding A CPF member who turns 55 years of age between 1 July 2014 and 30 June 2015 will need to set aside a Minimum Sum (MS) of S$155,000 in his Retirement Account (RA). The MS for 2013 was S$148,000. The MS was set at S$80,000 in 2003. It will be gradually raised until it reaches S$120,000 (in 2003 dollars) in 2015. The MS is adjusted yearly for inflation. Under the MSS, a CPF member may apply to receive his MS monthly payment when he reaches his draw-down age (DDA). See table below. Year of Birth Draw-down Age (DDA) of 1943 and before 60 years 1944 to 1949 62 years 1950 and 1951 63 years 1952 and 1953 64 years 1954 and after 65 years Source: CPF Website Participating in the CPF LIFE Scheme is a better choice than remaining in the MSS, because the monthly payment will continue for as long as the annuitant (CPF member) is alive. Once the MS is fully used up, the monthly payment will be discontinued. A CPF member who turns 55 years of age in or after 2013 and has at least S$40,000 or more in his Retirement Account (RA) each, it is compulsory for him to use his MS to participate in the CPF LIFE Scheme. The RA is set up to meet the member s basic needs during the member s old age. When he reaches the age of 55 years, he will need to set aside his MS, using the savings in his Ordinary and Special Accounts (OSA), in the RA. He can then withdraw the rest of the savings in his OSA in one lump sum. The CPF interest rates are mentioned in the table below. CPF Accounts Ordinary Account (OA) Special & Medisave Accounts (SMA) Retirement Account (RA) Interest Rates 2.50% per annum (Reviewed quarterly) 4.00% per annum (Reviewed quarterly) 4.00% per annum (Reviewed yearly) The interest rate for the Ordinary Account (OA) monies is either a market-related interest rate, based on the 12-month fixed deposit and month-end savings rate of the major local banks, or the legislated minimum rate of 2.50% per annum as specified in Section 6(4)(b)(i) of the CPF Act (Cap. 36), whichever is the higher. The interest rate for the Special and Medisave Account (SMA) is either the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, or 4% per annum, whichever is the higher, adjusted quarterly. The interest rate for the RA monies is either the 12-month average yield of the 10YSGS plus 1% at the point of issuance, or 4% per annum, whichever is the higher, adjusted yearly. As part of the Government s efforts to enhance the retirement savings of CPF members, an additional 1% per annum will be paid on the first S$60,000 of a member s combined balances, with up to S$20,000 from the OA. This works out to be 3.5% per annum earned on the first S$20,000 in a member s OA, and 5% per annum A4
Risk Management, Insurance And Retirement Planning earned on the first S$40,000 (up to S$60,000 if no OA savings) in a member s SMA and RA. The additional interest received on the OA will go into the member s SA or RA, to enhance his retirement savings. If a member is above the age of 55 years and participates in the CPF LIFE Scheme, the additional 1% per annum interest will still be earned on his combined balances, which will include the savings used for the CPF LIFE Scheme. 3.1 Topping Up The Minimum Sum (MS) The MS Topping-Up Scheme allows the CPF members to give top-ups to their loved ones SAs (for recipients below the age of 55 years) or RAs (for recipients aged 55 years and above). Such gifts help to build up the MS and can come from the member s CPF or in cash. To make a top-up using the member s CPF to their loved ones (i.e. grandparents' / parents' / siblings' / spouse's RA and / or siblings' / spouse's SA), the net balances in the member s OSA, including amount withdrawn for investments, must be more than the prevailing MS. Only OA balances can be used for the top-up. 3.2 Deferring Withdrawal Of CPF Funds At Age Of 55 Years After setting aside his MS, a member can choose to leave the remaining CPF balance in the RA with the CPF Board. By not withdrawing the remaining CPF savings, a CPF member can earn the prevailing interest and build up his retirement funds. 3.3 Increase In Draw-Down Age (DDA) With rising life expectancy, many members will outlive their CPF monthly payouts. There is a need to raise the DDA, currently the age of 63 years, and is set to increase to 64 in 2015 and 65 in 2018 with the introduction of the re-employment legislation, which came into force on 1 January 2012. Deferring the DDA by one year will allow more interest to be earned and extend the draw-down period by two more years. Those aged 57 years or younger today (as at 31 Dec 2007) will be affected by the later DDA. To help those in the group aged 50 to 57 years to cope with the increase in DDA, a one-off deferment bonus (D-Bonus) will be given to them into their RA. Older members will receive larger D-Bonuses. Those aged 54 to 57 years will receive 5% on their balances of up to S$30,000 each in their RA, i.e. up to a maximum of S$1,500 each. Those aged 52 and 53 years will receive 4% on their RA balances, up to S$1,200 each, while those aged 50 and 51 years will receive 3% on their RA balances of up to S$900 each. The Government is also encouraging members to voluntarily defer their DDA to the age of 65 years, by giving a voluntary deferment bonus (V-Bonus) for each year of deferment up to the age of 65 years. Members, aged 54 to 63 years in 2007, not having started the RA draw-down are eligible. The V-Bonus is set at 2% interest on RA balances capped at S$30,000, i.e. subject to a maximum of S$600 for each year deferred. A5
9. Retirement Funding Age (Years) At 31 Dec 2007 DDA (Years) D-Bonus 63 62-62 62-58 to 61 62-56 to 57 63 54 to 55 64 52 to 53 65 50 to 51 65 Source: CPF Website 5%, up to S$1,500 5%, up to S$1,500 4%, up to S$1,200 3%, up to S$900 V-Bonus 2%, up to S$600 x 1 year 2%, up to S$600 x 2 years 2%, up to S$600 x 3 years 2%, up to S$600 x 2 years 2%, up to S$600 x 1 year Maximum Total Bonus S$600 S$1,200 S$1,800 S$2,700 S$2,100 - S$1,200 - S$900 To find out how much D-Bonus and V-Bonus that one is entitled to, do refer to the online CPF MS D-Bonus and V-Bonus Calculator which can be found on the CPF Website at: www.cpf.gov.sg 4. MEDISAVE MINIMUM SUM (MSS) Besides the MS, the CPF member is also required to set aside a Medisave Minimum Sum (MSS) for his healthcare needs in his retirement. The MSS is the amount that the member needs to retain in his Medisave Account (MA) for his healthcare needs, before any excess MA savings can be withdrawn on or after the age of 55 years, subject to the applicable withdrawal rules, after meeting the CPF MS requirement. If the member has met the CPF MS requirement and do not have the MMS, when he makes a withdrawal at the age of 55 years and above, he needs to top up his MA with all or part of the balances from his CPF Ordinary Account and Special Account, to meet the MMS prevailing at the time of withdrawal. Since 1 July 2014, the MSS has been set at SS$43,500. 5. CASE STUDIES WITHDRAWAL FROM CPF AT AGE OF 55 YEARS 2 Upon reaching the age of 55 years, a CPF member can withdraw the first S$5,000 from his CPF. The CPF member can elect to withdraw any excess funds from his CPF after meeting both the Minimum Sum and the Medisave Minimum Sum. The four case studies below will illustrate how much a typical CPF member can withdraw from his CPF account. The required Minimum Sum and Medisave Minimum Sum used in the case studies are S$155,000 and S$43,500 respectively. 2 Case Studies are adopted from Reaching 55 booklet published by the CPF Board. A6
Risk Management, Insurance And Retirement Planning Case Study 1 Assume that Mr Ravi has the following balances in his CPF accounts: CPF Accounts Amount Ordinary Account (OA) S$3,000 Special Account (SA) S$1,000 Medisave Account (MA) S$500 Upon reaching the age of 55 years: Mr Ravi can withdraw all of his OA and SA savings, totalling S$4,000. S$500 stays in his MA. Case Study 2 Assume that Ms Anita has the following balances in her CPF accounts: CPF Accounts Ordinary Account (OA) Special Account (SA) Medisave Account (MA) Amount S$45,000 S$55,000 S$43,500 Upon reaching the age of 55 years: Ms Anita can withdraw the first S$5,000 of her CPF savings. The remaining S$95,000 from her OA and SA will go into her Retirement Account. If Ms Anita has already paid for her property using her CPF savings, these savings will be automatically counted to form up 50% of the Minimum Sum. If Ms Anita is unable to set aside S$155,000 in cash and property pledge, she will have a Minimum Sum shortfall. This means that she will need to make up the Minimum Sum shortfall at subsequent withdrawals, before any excess savings are paid to her in cash. Case Study 3 Assume that Madam Polly has the following balances in her CPF accounts: CPF Accounts Ordinary Account (OA) Special Account (SA) Medisave Account (MA) Amount S$100,000 S$180,000 S$20,000 Upon reaching the age of 55 years: S$155,000 from her OA and SA will go to Retirement Account first. S$23,500 from her SA is transferred to MA to meet the Medisave Minimum Sum. Since Madam Polly has met both the Minimum Sum and Medisave Minimum Sum, she can withdraw S$101,500 from her CPF account. A7
9. Retirement Funding Case Study 4 Assume Mr Ahmad has the following balances in his CPF accounts: CPF Accounts Ordinary Account (OA) Special Account (SA) Medisave Account (MA) Amount S$100,000 S$200,000 S$43,500 Upon reaching the age of 55 years: S$155,000 from his OA and SA will go to Retirement Account first. Mr Ahmad can withdraw S$145,000. He has met both the Minimum Sum fully in cash, and does not need to make a property pledge. He does not have a Medisave Minimum Sum shortfall as well. 6. CENTRAL PROVIDENT FUND INVESTMENT SCHEME (CPFIS) The Central Provident Fund Investment Scheme (CPFIS) was first introduced on 1 May 1986. It now provides CPF members with more options to enhance their retirement savings through investments. Under this scheme, members can use their CPF savings to purchase any of the investment instruments approved by the CPF Board. The investment returns are credited back into the CPF member s account, and can be taken out only when the member reaches the age of 55 years. From 1 July 2010, only monies in excess of S$20,000 in the CPF member s OA and S$40,000 in the SA can be invested. However, the member can continue to service his regular premium insurance policies (but NOT recurring single premium insurance policies or regular savings plans for unit trusts) and agent bank fees, even if the OA balance falls below S$20,000. 7. THE SUPPLEMENTARY RETIREMENT SCHEME (SRS) The Supplementary Retirement Scheme (SRS) was introduced by the Government on 1 April 2001 as a voluntary scheme to encourage working individuals to save for their retirement, over and above their CPF savings. The scheme is open to all working individuals who are at least 18 years of age. These include self-employed individuals and foreigners working in Singapore. SRS participants will enjoy a range of investment choices in financial assets (excluding real estate) approved by the CPF Board. They can invest as often, as much or as little as they like through their SRS accounts, subject to a contribution cap. The contribution cap is determined by multiplying the appropriate SRS contribution rate by an absolute income base. The contribution rate for Singaporeans and Permanent Residents will be 15% of their income, in recognition of the fact that they have no access to the tax benefits afforded by the CPF schemes. The absolute income base, derived from 17 months of the CPF monthly salary ceiling, is S$85,000 per annum from 2011 onwards. This amount is subject to change from time to time. SRS offers attractive tax benefits. Contributions to SRS are eligible for tax relief, investment returns are accumulated tax-free [with the exception of Singapore dividends from which tax is deducted or deductible by the payer company under Section 44 of the Income Tax Act (Cap. 134)], and only 50% of the withdrawals from SRS are taxable at retirement. However, if a withdrawal is made before the statutory A8
Risk Management, Insurance And Retirement Planning retirement age prevailing at the time of the first contribution, 100% of the sum withdrawn will be subject to tax. A 5% penalty for premature withdrawal will also be imposed, unless it is made under exceptional circumstances. These circumstances are: death; medical grounds; bankruptcy; and the full withdrawal of the SRS balance by a foreigner who has maintained his SRS account for at least 10 years from the date of his first contribution. In the Government Budget 2008, the Minister of Finance also made certain favourable changes to SRS. These are described in the table below. Current Treatment New Treatment (From 1 October 2008) 1 Employers cannot directly contribute Employers can contribute to their employees to their employees SRS accounts. SRS accounts, subject to the current SRS contribution limits, and claim full tax deduction. SRS members will enjoy tax relief on the contributions made by their employers. 2 SRS members can contribute up to the prevailing statutory retirement age. They can withdraw their SRS monies over 10 years from the prevailing statutory retirement age. 3 Individuals without any earned employment income in the previous year cannot contribute to SRS in the current year. SRS members can contribute beyond the prevailing statutory retirement age, up to the point of their first penalty-free withdrawal. They can withdraw their SRS monies over 10 years from the date of their first penalty-free withdrawal. Withdrawals will continue to be penalty-free only if they take place after the statutory retirement age that was prevailing at the time of the first contribution. Individuals without any earned employment income in the previous year can contribute to the SRS in the current year. Source: Ministry of Finance Website 8. INSURANCE Traditional policies such as Endowment Insurance, Whole Life Insurance and Investment-Linked Policies can be used to fund one s retirement. For example, an individual can purchase an Endowment Insurance policy to mature at his retirement age, say 62 years, and use the maturity proceeds to purchase an annuity or deposit it with a bank, and live on the interest, or both the interest and principle sum. He can do the same for the other life insurance products as already mentioned. (By the way, SRS contributions can be used as a single premium payment for the purchase of an Endowment Insurance policy.) However, purchasing an annuity is a more feasible choice than leaving the money in the bank for most people. The reasons are mentioned below. A9
9. Retirement Funding The person may not have the discipline to not over-draw from the account for reasons, such as going for tours more often than planned. This will cause the principal sum to deplete faster. Annuity policies are specially designed to protect one against living too long and outliving his resources. Most annuity payments continue to be paid, even though the principal sum (purchased price) has been exhausted. Depending on the type of annuity bought, some annuity payments continue to pay out up to a certain period, or a lump sum to beneficiaries even after the demise of the annuitant. Let us look at what an annuity is and how it works. 8.1 What Are Annuities? An annuity is a contract that provides a guaranteed periodic income to the annuitant for life (or a shorter specified period), with income payments made yearly, half-yearly, quarterly or monthly. Annuities have sometimes been described as the opposite of life insurance, because life insurance provides protection against someone dying too soon, while annuities provide protection against someone living too long living so long as to outlive one s financial resources. Although not strictly a life insurance product, annuities are sold by life insurers in Singapore. One can either use cash or the CPF Minimum Sum to purchase annuities. 8.2 How Do Annuities Work? How an annuity policy works is dependent on which category that it falls under. Annuities can be classified in many different ways, depending on the point of emphasis. Figure 9.1 gives an illustration of the various ways on how Annuities may be classified. A10
Risk Management, Insurance And Retirement Planning Figure 9.1: Classification Of Annuities By parties in the contract Single Life Joint Lives Survivorship ANNUITIES By time when benefits begin By method of purchase Immediate Deferred Single Premium Instalment Premium Straight or Pure Life By plan of distribution Instalment Guarantee or refund Cash By amount of annuity payment Fixed dollar Variable or equity-indexed Period certain 8.2.1 Number Of Lives Covered The annuity may cover a single life or more than one life. A contract that covers two or more lives may be a Joint-life Annuity, or a Joint-and-last-survivor Annuity. The Jointlife Annuity provides that the annuity income ceases at the first death among the lives covered. A Joint-and-last-survivor Annuity, on the other hand, provides that the annuity income ceases only at the last death among the lives covered. Both types of joint life annuity policies are not common here in Singapore. 8.2.2 Time When Benefit Payments Commence Annuities can also be classified as immediate or deferred. An immediate annuity makes the first benefit payment on one payment interval after the date of purchase. For example, if the contract provides for monthly payments, the first benefit payment is due one month after the date of purchase. If, on the other hand, the annuitant opts for annual benefit payment, then the first payment is due one year after the date of purchase. An immediate annuity is always purchased with a single premium payment. Under a deferred annuity, usually several years will elapse between the date of purchase and the time when payments commence. During the deferment period, the premiums used to purchase the annuity earn an investment return. As one ages, the annuity becomes A11
9. Retirement Funding costlier. Annuity policies approved under the CPF MSS are deferred annuities. The CPF member purchases the annuity at the age of 55 years using his Minimum Sum, and the annuity payment starts at his age of 62 years. 8.2.3 Method Of Premium Payment Immediate annuities must be purchased with a lump sum payment. As for deferred annuities, the payment may be in a lump sum or by periodic payments. Periodic payments may be scheduled level deposits or may be flexible deposits, with the amount and timing at the purchaser s discretion. Deferred annuities provide an attractive and convenient method of accumulating the necessary funds for an adequate old age income. 8.2.4 Nature Of The Insurer s Obligation (a) Straight Or Pure Life Annuity A pure annuity, often referred to as a straight life annuity, provides periodic (usually monthly) income payments that continue as long as the annuitant lives and terminate at the annuitant s death. The annuity is considered fully liquidated upon the annuitant s death, regardless of how soon that may occur after purchase. No refund is payable to the deceased annuitant s estate, and there is no guarantee that any particular number of monthly payments will be made. This non-refund feature applies to both an immediate and a deferred annuity. So under a pure annuity, no part of the purchase price will be refunded even if the annuitant dies during the accumulation period, before the benefit payment commences. However, some insurers do provide for a refund of all the premiums paid, with or without interest, in the event of the insured s death, before commencement of the annuity payment, with no refund feature after the annuity payment starts. (b) Guarantee or Refund Annuity The guarantee or refund feature can be in one of the following forms: a promise to provide at least a certain number of annuity payments whether the annuitant lives or dies; or a promise to refund all or a portion of the purchase price in the event of the annuitant s early death. The three common types of refund annuities are: Life Annuity Certain; Instalment Refund Annuity; and Cash Refund Annuity. Life Annuity Certain: This annuity pays a guaranteed number of monthly payments, regardless of whether the annuitant lives or dies, and payments will continue for the whole of the annuitant s life if he lives beyond the guaranteed period. Instalment Refund Annuity: Under this type of annuity, if the annuitant dies before receiving the monthly payments equal to the purchase price of the annuity, the payments will continue to a designated beneficiary or beneficiaries until the full cost is recovered. As with Life Annuity Certain, the annuity payments continue for as long as the annuitant is alive, even when the purchase price has been recovered in full. A12
Risk Management, Insurance And Retirement Planning Cash Refund Annuity: This type of annuity promises at the annuitant s death, to pay to the annuitant s estate or to a designated beneficiary in a lump sum amounting to the difference, if any, between the purchase price and the sum of the monthly payments. So far, only these three types of refund annuities have been approved by the CPF Board under the MSS. 8.2.5 Fixed And Variable Annuities A fixed annuity pays a fixed amount of annuity benefits on every payment date. A variable annuity, on the other hand, provides benefits adjusted to changes in the market value of the assets (typically common stocks and / or bonds) in which the annuity reserves are invested. The main advantage of fixed annuities lies in their security and low risk. This is to say that, regardless of the performance of their underlying investments, the annuitant is always assured of a continuous stream of periodic income, often for a lifetime. Thus, fixed annuities can be ideal for retirees and other risk-averse people who do not want to subject themselves to the risks of investment. With fixed rate annuities, you get a certain amount of return on your annuity investment, without exposing yourself to high investment risk. Conversely, the downside to fixed annuities is the fact that they offer no room for growth, and regardless of how well the investments made using your annuity premium performs, you still get a fixed return from it. For asset accumulation products that are used as annuities, their main advantage is the room for growth that they offer, which may potentially translate into significantly higher returns in the long run. The downside to variable annuities is the fact that they expose the annuitant to the investment risk. If the investments made using the annuity premium perform poorly, the annuitant may end up seeing a significantly diminished stream of periodic income from the annuity. 8.3 Benefits & Limitations Of Annuity Policy The benefits and limitations of an annuity policy are described below. BENEFITS Annuity payout is free from income tax. It provides guaranteed income. It provides option for annuitant to pay the purchase price over his working years. Investment returns earned during the accumulation period are tax-free. Capital may be guaranteed depending on the types of annuity purchased. LIMITATIONS It cannot be used for death protection, and should be purchased only after provision for premature death is in place. It cannot be used to provide for major or critical illness protection. A13
9. Retirement Funding It is not suitable for people in poor health. It usually does not have any feature to counter the effect of inflation, although some insurers provide for participation in profits. 8.4 CPF LIFE Scheme 3 The CPF Lifelong Income For the Elderly (CPF LIFE) Scheme was first mooted in 2007 by the Singapore Prime Minister for the need of a lifelong income system for Singaporeans. It is a scheme that will provide a monthly payout starting from the Draw-Down Age (DDA), for as long as the CPF member lives. The CPF member who turns 55 years old from 1 January 2013 and is either a Singapore Citizen or Permanent Resident will be placed on the CPF LIFE Scheme if he has at least: 1. S$40,000 in his Retirement Account (RA) when he reaches the age of 55 years; or 2. S$60,000 in his RA when he reaches his DDA. However, if he has already attained the age of 55 years and is not placed on the CPF LIFE Scheme, he can apply to join CPF LIFE before his 80 th birthday. 8.4.1 CPF LIFE Bonus To encourage and help Singapore citizens born before 1963 to join the CPF LIFE Scheme, the Government will provide a bonus of up to S$4,000, called the LIFE Bonus (L-Bonus). To receive the L-Bonus, the CPF member will need to join the CPF LIFE Scheme as shown below. If the CPF member was born in: When to join CPF LIFE Scheme? 1955 to 1962 Within 12 months after turning the age of 55 years The amount of LIFE Bonus that one receives depends on the annual assessable income (AI) and annual value (AV) of his property. The CPF LIFE Payout Estimator at www.cpf.gov.sg can help the CPF member to estimate the LIFE Bonus that he will receive. 8.4.2 CPF LIFE Plans There are two CPF LIFE plans, each with a different combination of trade-offs between the monthly payouts that the CPF member receives and the bequest he leaves for his beneficiaries: Plan Type Monthly Payout Bequest LIFE Standard Plan Higher Lower LIFE Basic Plan Lower Higher 3 Adapted from www.cpf.gov.sg A14
Risk Management, Insurance And Retirement Planning A CPF member may choose between the two types of CPF LIFE plans. If he does not choose a plan within six months from his 55 th birthday, he will be automatically placed on the LIFE Standard Plan. 8.4.3 CPF LIFE Standard Plan Annuity premiums will be taken from the CPF member s RA in two instalments. When the member is 55 years old, the CPF Board will deduct the member s RA savings up to the Minimum Sum Cash Component (MSCC) that applies to him as the first instalment of his annuity premium. The rest of his RA savings will stay in his RA. The MSCC is half of the MS that applies to him. One to two months before the CPF member s DDA, the CPF Board will deduct the rest of his RA savings as the second instalment of his annuity premium. This will include any new money that he has built up between his 55 th birthday and his DDA. The new money can be from any CPF top-ups, transferring of funds from other accounts into the CPF member s RA, interest earned, or refunds from selling property or investments. When the member reaches his DDA, he will start to receive monthly payouts from the annuity fund. The annuity fund is also known as the Lifelong Income Fund. In this context, it consists of the annuity premium, the interest earned on the annuity premium and the 1% extra interest earned by members on the CPF LIFE Standard Plan. 8.4.4 CPF LIFE Basic Plan Annuity premiums will be taken from the CPF member s Retirement Account (RA) in two instalments. When the CPF member is 55 years old, the CPF Board will deduct a small portion (about 10%) of his RA savings as the first instalment of his annuity premium. The rest of his RA savings will stay in his RA. One to two months before the CPF member s DDA, the CPF Board will deduct a small portion of any new money that has built up in his RA between his 55 th birthday and his DDA as the second instalment of his annuity premium. When the CPF member reaches his DDA, he will receive monthly payouts (paid from his RA) starting up until one month before he reaches the age of 90 years. Once he reaches the age of 90 years, he will continue to receive monthly payouts (paid from the annuity fund) for as long as he lives. 8.4.5 What Happens Upon Death? Under the CPF LIFE plans, all unused annuity premium and RA savings, if any, will be refunded after the CPF member s death. The refund will be paid into the CPF member s account and it will be paid, with his remaining CPF savings, to his beneficiaries. THE CPF LIFE Payout Estimator at www.cpf.gov.sg can help the CPF member to estimate the bequest that will be left for his nominated beneficiaries. A15
9. Retirement Funding 8.4.6 Case Study 4 Mr. Tan s background Mr Tan is a Singaporean who will be attaining the age of 55 years in December 2014. He has S$100,000 in his RA and will be placed on the CPF LIFE Scheme. He can choose between the two existing plans (the LIFE Standard Plan or the LIFE Basic Plan). Option 1: If he chooses the LIFE Standard Plan When Mr Tan reaches the age of 55 years, the CPF Board will deduct S$77,500 (the MSCC that applies to him) from his RA as the first annuity premium for his LIFE Standard Plan. The rest of his RA savings (S$22,500) will stay in his RA until his DDA. About one to two months before Mr Tan reaches the age of 65 years, the CPF Board will deduct the rest of his RA savings (S$22,500), together with any interest that has built up and any other new money in Mr Tan s RA, as the second annuity premium for his LIFE Standard Plan. This is based on the assumption that Mr Tan does not use or promise to use money from his RA to buy a property. If he does use money from his RA to buy a property, his monthly payouts at the age of 65 years will be much lower. When Mr Tan reaches the age of 65 years, he will receive a monthly payout of between S$822 and S$908 for as long as he lives. The monthly payout includes the payment from the two annuities that he bought. The amount of monthly payout that he can receive is based on the assumption that there is no new money paid into Mr Tan s RA between the age of 55 years and his DDA (the age of 65 years). Depending on how old Mr Tan is on the date of his death, his nominated beneficiaries may receive bequests as illustrated below. Based on how old Mr Tan Bequest (Estimated) is on the date of his death 65 years old S$108,505 to S$109,894 75 years old S$11,909 to S$12,571 85 years old S$0 Option 2: If he chooses the LIFE Basic Plan When Mr Tan reaches the age of 55 years, the CPF Board will deduct approximately 10% of S$100,000 from his RA as the first annuity premium for his LIFE Basic Plan. The rest of Mr Tan s RA savings will stay in his RA until his DDA. Between the age of 55 years and his DDA, Mr Tan can have new money paid into his RA. The CPF Board will deduct approximately 10% of this new money from the RA as the second annuity premium about one to two months before Mr Tan s DDA. When he reaches the age of 65 years, Mr Tan will receive an estimated monthly payout of between S$737 and S$815 from his RA until his 90 th birthday. The amount of monthly payout that he can receive is based on the assumption that there is no new 4 The following case study is adopted from the CPF LIFE: Retire With Peace of Mind by the CPF Board. A16
Risk Management, Insurance And Retirement Planning money paid into his RA, other than the 1% extra interest between his 55th birthday and his DDA (65 th birthday). When he reaches the age of 90 years, he will start to receive an estimated monthly payout of between S$737 and S$815 from his LIFE annuity. The monthly payout includes a payout of about S$50 from the extra interest which is paid from the RA, for as long as it is being earned. Depending on how old Mr Tan is on the date of his death, his nominated beneficiaries may receive bequests as shown below. 8.4.7 Considerations Based on how old Mr Tan Bequest (Estimated) is on the date of his death 65 years old S$146,080 to S$153,009 75 years old S$105,914 to S$112,305 85 years old S$48,151 to S$50,886 As a new scheme, many people would have queries as to whether they should join the CPF LIFE Scheme and which plan to select. This includes your clients who are eligible to join now and needs to make their choice. For those who turn 55 years old in year 2013, it is mandatory for them to participate in the CPF LIFE Scheme if they have more than S$40,000 each in their RA. As a professional financial consultant, advising your clients on the CPF LIFE Scheme should form part of the retirement planning process, as making the wrong choice could have serious repercussions for your clients in their retirement years. The clients should know that, once entered into the CPF LIFE Scheme, they could not change plans or withdraw. Listed below are some areas for consideration on whether they should join the CPF LIFE Scheme and, if yes, which plan to choose: a. How much bequest does the client wish to leave for his beneficiaries (if any)? b. The amount of monthly payout desired by the client? c. The client s financial health. d. The client s balance in his RA and the amount of funds that the client is investing in the CPF Life Scheme (if he chooses to). e. The age at which the client is participating in the CPF LIFE Scheme. f. Does the client have any pre-existing illnesses that may possibly shorten his life expectancy? g. Does the client have other needs that potentially forbid him to join the CPF LIFE Scheme? h. Does the client have better options available for investment? 9. SAVINGS AND INVESTMENTS This is yet another source of income for retirement. It can provide both income streams and a lump sum cash amount for the client s retirement. Investment instruments available to investors include: cash and cash equivalents; shares; derivatives; bonds; A17
9. Retirement Funding unit trust; real estate (property) investments; and structured products. Let us look at each of them in turn. 9.1 Cash & Cash Equivalents Cash and cash equivalents are assets that are highly liquid and practically risk-free. It includes: cash; savings deposits; fixed deposits; and money market funds. 9.2 Shares This type of investment provides the lowest returns of all financial instruments. The interest earned is fixed and can provide an income stream to the investor, or be left with the bank. However, as the interest is fixed, this asset is subject to inflation risks. Note that there is no scope for capital appreciation for investments in cash equivalents. Shares (also known as common stocks) are financial securities that represent ownership interests in a corporation. They may be purchased from the Singapore Stock Exchange (SGX) through a broker or online using an Internet account opened with a selected stock broking firm. People buy shares for two main reasons as appended below. to receive income in the form of dividend paid by the corporation. This is the income stream that the investor receives; and to obtain capital gain through buying at a low price and selling at a high price. Selling the shares will provide the investor with a lump sum of cash. Shares are appealing to investors because of the substantial return opportunities that they offer. This is because they generally provide attractive, highly competitive returns over the long term. However, investment in shares is a risky venture. It is subject to different types of risks which include business and financial risk, purchasing power risk, market risk and possibly event risk. As a retiree, it is important to understand that not all kinds of stocks may be suitable, since the ability to absorb losses is lower, assuming that there is no employment or passive income and a shorter remaining life span. The list that follows describes some of the more common categories. Growth Stocks: This refers to stocks of companies whose sales and earnings are expanding faster than the general economy and / or other stocks. These companies are usually aggressive, and they plough back most of its earnings for future expansion. Therefore, they usually pay little or no dividend. Investors buy these types of stocks for capital appreciation. They are usually very volatile and risky, but may offer huge returns in the short run. As such, retirees should normally steer clear of this category of stocks. Income Stocks: These are stocks of companies that consistently pay higher than average dividend yields. When economic conditions become uncertain, investors A18