Why Annuity Is a Good Idea For Your Retirement Planning in Singapore

Annuities have a storied history, tracing back to Ancient Rome, where the term “annuity” originates from the Latin word annua, meaning annual payments exchanged for a lump sum. Historically, annuities have been creatively utilised for various purposes, including financing wars, providing for widows, and ensuring retirement security for church ministers. In the United Kingdom, the wealthy elite capitalised on this financial tool, especially when laws favoured its use.

In Singapore, with an ageing population, awareness of annuities as a vital component of retirement planning gained momentum following the introduction of CPF LIFE in 2009. This initiative marked a significant transformation from earlier retirement schemes that primarily emphasised self-reliance and lump-sum withdrawals.

Here are several key reasons why annuities are considered advantageous:

Guaranteed Income Stream

Annuities provide a dependable source of income either for a specified period or for the remainder of one’s life. This feature is particularly beneficial for retirees who need to cover essential expenses without the risk of outliving their savings. Unlike other investments that may fluctuate in value, annuities offer predictable payouts, contributing to financial stability during retirement.

Protection Against Longevity Risk

In Singapore, the average life expectancy is approximately 80 years for males and 85 years for females. A primary concern among retirees is the fear of outliving their savings. Annuities address this risk by guaranteeing income for life, regardless of how long one lives. This assurance allows individuals to plan confidently for their future without the anxiety of depleting their funds.

Flexibility and Customisation

The development of annuity products in Singapore has evolved significantly over the past decade, reflecting changes in consumer needs and market dynamics. Annuities now come in various forms—fixed, variable, indexed—and can be tailored to meet individual preferences. Investors can choose options such as payment frequency, duration of payments, and additional features like death benefits or return of purchase price provisions.

Protection from Market Volatility

Fixed annuities offer protection against market fluctuations, ensuring that the principal remains intact and that payouts are unaffected by economic downturns. This characteristic makes annuities appealing to conservative investors who prioritise capital preservation over high returns.

Disadvantages of Annuities

On the flip side, annuities also come with disadvantages:

Lack of Liquidity: Once funds are invested in an annuity, accessing them can be challenging without incurring penalties. This lack of liquidity may pose problems during emergencies or unexpected financial situations.

Lower Returns Compared to Other Investments: While annuities provide stability, they typically offer lower returns compared to stocks or other investments over the long term. This may not be suitable for those seeking significant growth.

From a straw poll of individuals in their 50s and 60s, the results presented a lack of knowledge about annuities and their options. Notably, concerns about liquidity often lead them to favour fixed deposits instead.

As you evaluate your retirement portfolio, consider integrating an annuity into your financial strategy. Annuities not only provide a reliable income stream but also serve as a safeguard against market volatility and longevity risk. By adding an annuity to your retirement plan, you can establish a solid foundation that allows you to enjoy your golden years with confidence and peace of mind. 

Speak to your trusted financial planner to explore how an annuity can complement your overall retirement strategy and help ensure that you have the resources necessary to meet your long-term needs.

The article above should not be taken as financial advice. Investments and their corresponding products have risks. Please seek advice from a financial adviser representative before making any investment decisions. In the event that you choose not to seek advice from a financial adviser representative, you should consider whether the investment or product in question is suitable for you.