The government has recently put a lot of effort into promoting the “HKMC Annuity Plan”. They invited the spokesperson to wear makeup and act as an old man playing a game of Monopoly in an ad. The ad indicated that even during retirement, one might still have a lot of expenses such as property management fees, banquet fees, maintenance fees and other miscellaneous living expenses. This made people wonder whether they had enough retirement savings and prompted heated discussions about whether “I need to buy an annuity plan?”
1. What is an annuity?
The government annuity is actually an insurance product based on the idea of making a single lump sum payment and withdrawing the interest in monthly instalments, over a period of time. The annuitant needs to pay a single premium up front from which he can receive a monthly retirement income. The monthly amount receives will subject to gender, age and the amount of premium. The government annuity plan guarantees monthly annuity payments that in total will be equal to at least 105% of the premium paid1.
After the guaranteed payment period, the annuitant can continue to receive monthly payments for the rest of his life. In other words, the longer one lives, the more the cumulative payments will be. For example, a 65-year-old male annuitant lodging a total premium of HK$1 million, will receive maximum monthly annuity payment of HK$5,800 (based on the maximum tentative estimates of an internal rate of return of 4%). This guarantees that he will receive at least 182 monthly payments (i.e. 15 years and more), equivalent to HK$1.05 million in total. 15 years later, the annuitant can continue to receive monthly annuity payments of HK$5,800 for the rest of his life2, which is a very stable retirement income.
2. Will I live that long?
In the above example, the annuitant will only receive payments beyond the guaranteed period when he reaches the age of 81. So one might ask: Will I live that long? According to the Hong Kong Census and Statistics Department, in 2020, the life expectancy for men and women was 82 years and 88 years respectively3. The figures show that Hong Kong people will have a longer life expectancy as time goes. And with medical advancements, there are likely to be more and more centenarians in the future. Buying an annuity plan is in fact a “hedge on longevity” that can lower the risk of not having enough money to spend when you get old.
3. Is the return on the annuity too low?
First of all, one must understand that an annuity is a retirement protection plan, and should not be compared to the return of investment tools such as stocks, foreign exchange, and bonds etc. For example, one single failure in an investment portfolio can lead to irreparable loss. And an investment portfolio should be reviewed regularly. When you grow older, you might not have the stamina, or analytical ability to stay constantly close to the investment market. Dr Law Chi-kwong, the Secretary for Labour and Welfare, said that the annuity payments from the Government plan will not be counted as income under the Old Age Living Allowance Scheme4. So if you apply for the allowance successfully, you’d earn $2,000 and more, which in turn, means a higher rate of return.
4. If I were aged 52, and not eligible to buy the government annuity, what can I do?
You can buy a retirement fund or saving plan, so you can save up an extra HKD 1 million to take up the HKMC Annuity Plan. Another option is to choose a long-term annuity plan from a private financial institution. These plans generally offer more investment options, and you can start contributing while you are still at work, these plans also commonly use the compound interest approach to accumulate more funds before retirement, so you are entitled to more monthly annuity payments later. There are many different types of annuity plans in the market, some offer flexibility on receiving the returns, which you can choose based on your need.
And finally, sons and daughters can also consider to buy an annuity plan for their parents as a token of gratitude. So they can have more monthly income to enjoy a gourmet or go for a trip, and that also implies a meaning of “Wishing you health and longevity”. Whether you are planning for your own or your parents’ retirement, you can use Retirement Calculator to understand your retirement gap, or click Foresight Deferred Annuity Plan to learn more.
1. HKMC Annuity Plan Product Brochure
2. Hong Kong Monetary Authority - Life Annuity Scheme (Visited on 2018/8/9)
3. Census and Statistics Department – Demographics (Visited on 2021/2/26)
4. HKSAR Labour and Welfare Bureau SLW’s Blog on Allowance and Annuity (2018/5/6)
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