CPF Life vs Private Annuity Plans: Which Is Better For Retirement in Singapore?

If you're thinking about building your retirement funds, chances are you've probably thought about purchasing an annuity plan. But how is an annuity plan different from CPF LIFE and should you consider choosing one over the other?

When it comes to retirement funds, the first thing that comes to mind is probably your CPF Retirement Account (RA) savings.

However, with inflation reaching record levels and the cost of living inching upwards, there's been growing concern about whether our CPF RA savings would be enough to support our retirement needs.

As such, you may be looking at other means to increase your retirement funds. One of those ways is through an annuity plan.

But what is a private annuity plan, and is it better than CPF LIFE?

What is a private retirement annuity plan, and how is it different to CPF LIFE?

As the name suggests, a retirement annuity plan is an insurance plan designed to supplement your retirement years by providing you with regular payouts when you retire.

Basically, you fund an annuity plan by paying either a monthly or lump-sum premium during your working years. 

In exchange, you’ll receive regular payouts for a fixed period of time or for the rest of your life when you retire. 

At first glance, this may sound similar to our national retirement plan, the CPF Lifelong Income For The Elderly (CPF LIFE). Indeed, CPF LIFE is an example of an annuity plan; it provides CPF members with lifelong monthly payouts to support their retirement years.  

However, there are differences between both, and each has its merits. We’ll explain their differences below and how they compare against each other.

Private annuity plan vs CPF LIFE: what’s the difference?

1. Source of funds

Your CPF LIFE payouts are from your CPF RA savings. The more savings that you have, the higher your CPF LIFE payouts.

When you reach 55 years of age, you'll be able to withdraw up to S$5,000 of your CPF savings once you've hit the Full Retirement Sum (FRS). You'll then receive monthly payouts from CPF LIFE when you turn 65.

In a private annuity plan, you pay the premiums with cash or from other assets (including under the CPF Investment Scheme (CPFIS)). The premiums that you pay are pooled together along with other policyholders into a fund. The money will then be reinvested into other assets for higher returns.  

2. Payout duration

As previously mentioned, you'll start receiving your CPF LIFE payouts when you reach 65 years old and this will continue throughout your life. You can, however, choose to delay your CPF LIFE payouts until you’re 70 years old to receive up to 7% more p.a.

Regardless, CPF LIFE guarantees that you'll have a steady stream of income for the rest of your life, so you don't have to worry about outliving your savings.

On the other hand, a private annuity plan pays you for a fixed period (e.g. 10, 15, or 20 years). That said, there are some private annuity plans that provide lifetime payouts.

The benefit of having a private annuity plan is you have the option to choose when you want to start receiving your payouts. For instance, you can opt to receive your payouts during the early stages of your retirement years when you're healthier and therefore may spend more on expenses such as travel or hobbies.

On the other hand, you can also choose to defer your payout age till later. This gives you more money to cope with inflation or other healthcare needs as you get older.  

Aside from that, You can even choose how often you want to receive payouts. For instance, whether you want to receive them monthly, quarterly, half-yearly, or yearly.

3. Payout amount

The amount of payout that you receive from CPF LIFE is determined by the amount of savings you have in your CPF RA, the CPF LIFE plan that you choose, and your age and gender. 

Remember also that you earn a risk-free return of 4% to 6% p.a. based on your CPF RA savings. Once you've formed your CPF RA, you have a sense of how much you will be getting from CPF LIFE by the time you reach your retirement payout age. 

In fact, the payouts from CPF LIFE are higher than a private annuity plan if you put in the same amount of savings. The reason is that your CPF monies are invested in Special Singapore Government Securities (SSGS), which provide stable risk-free returns that are higher than what is available in the market.

On the other hand, the returns from your private annuity plan are based on the guaranteed as well as the non-guaranteed component of your policy. 

The guaranteed component is the sum that you’ll receive when your policy matures, while the non-guaranteed component may include bonuses and cash dividends you’ll receive based on the fund’s performance. 

Provided that you don’t surrender your policy, the guaranteed returns would be higher than the premiums that you would've paid. The returns from the non-guaranteed component, on the other hand, will depend on the performance of your fund.

So while the guaranteed payouts would usually be higher than the total premium you would have paid, the overall returns may be lower than what you would receive from CPF LIFE if the non-guaranteed component underperforms. 

4. Termination of policy

You can apply to be exempted from CPF LIFE and make a full withdrawal provided that you're 55 years and above, and have a pension or an annuity plan which provides the same or higher monthly payouts for life.  

If the payments from your annuity plan are lower than CPF LIFE, you can still apply for a partial withdrawal. 

Note that if make a withdrawal from CPF LIFE and surrender/terminate your annuity plan in the future, the surrender value of your annuity plan must be returned to your CPF RA, up to the FRS.

If you've joined CPF LIFE and want to cancel your plan, you can only do so if you plan on leaving Singapore/West Malaysia permanently, or if you're fully exempted from setting aside a retirement sum in your RA because you're receiving monthly payments from your annuity plan. 

For a private annuity plan, you can cancel anytime or choose to make partial withdrawals. But since these policies are meant for the long-term, early termination will likely result in penalties or a lower capital return, so it's best to check the terms before you sign.

Conclusion: which one should you opt for?

As we’ve outlined above, both CPF LIFE and private annuity plans have their own merits. CPF LIFE provides risk-free and guaranteed returns that will continue to pay you for as long as you live.

CPF LIFE is a national annuity plan designed for the masses; so while it doesn't offer as much flexibility as an annuity plan, CPF LIFE provides risk-free and guaranteed returns that will continue to pay you for as long as you live.

Conversely, a private annuity plan is more flexible; as mentioned, you can choose to receive payments earlier or later, adjust the payout period, decide on the premium payment term, or make a partial withdrawal if you need emergency cash or if you want to liquidate your investment portfolio.

The downside of an annuity plan is the income that you receive may be lower than what you would get from CPF LIFE. Furthermore, not all annuity plans offer lifelong payouts.

That said, if your budget allows it, a better way to maximise your retirement funds is to purchase an annuity plan and keep your CPF LIFE plan.

This way, your CPF LIFE payouts can cover your basic living expenses while the income that you receive from your annuity plan can help supplement your retirement funds on top of what you receive from CPF LIFE, thus ensuring that you can live the lifestyle that you want. 

If you're considering purchasing an annuity plan in Singapore, check out the best annuity plans to buy in Singapore.

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