Does annuity mean a lifelong retirement income?
How can I compare different deferred annuity products?
Is the premium for an annuity tax-deductible?
Hong Kong has an ageing population. Longevity is placing pressure on both individual finances and the social welfare system. An annuity is a retirement planning tool that helps individuals turn their accumulated savings into a stable stream of income over a period of time, thus mitigating the financial risks associated with longevity. A policyholder pays a premium (in a lump sum or by instalments) to an insurer, which in turn, provides the policyholder with a regular annuity starting from a designated annuitisation age or period until the policyholder passes away or the end of the annuitisation period.
Product features
In terms of when the annuity income starts:
In terms of how long the annuity income lasts:
- To promote voluntary retirement savings, since 1 April 2019, the Government has offered a tax deduction for premiums for specified deferred annuity products (i.e. the Qualifying Deferred Annuity Policy, also known as the QDAP).
- Taxpayers can claim a tax deduction for their qualifying deferred annuity premiums up to a maximum limit of HK$60,000 per assessment year. Note that the tax-deductible limit is the aggregate of qualifying deferred annuity premiums and MPF tax-deductible voluntary contributions.
- The Insurance Authority (IA) certifies deferred annuity products that meet the criteria for a QDAP.
- To help members of the public obtain information about QDAPs to facilitate smart decision-making, the IA launched a one-stop search tool, called QDAP Selection Made Easy. You can use the tool to choose and compare among available QDAP options based on your needs and preferences. You can also obtain a full list of QDAPs that are available in the market and review the relevant product information.
- First, learn about the policy structure. In general, the amount of each payout is fixed. For the same insured sum, the longer the annuity period, the smaller the amount of the payout. However, some policies may offer a step-up provision, whereby the payout amount will gradually increase over the annuity period. But the length of premium payment period may affect the accumulation period, and thus the amount of the annuity payment.
- Assess your personal needs and financial situation, including long-term affordability, liquidity needs, whether the length of the premium payment period and annuity period suits your life planning, and so forth. Ask yourself a few questions, such as the age at which you intend to retire, your expected annuitisation age, and the length of your expected retirement life. For example, if you plan to retire at the age of 65, you expect a 20-year retirement life, and your other assets are sufficient to meet your financial needs for five years, you may need a QDAP with only a 15-year annuity period. Regarding the payment period, assuming the same total premiums, if your liquidity is adequate, you may consider taking out a policy with a shorter premium payment period. However, if you would like to reduce the payment for each instalment, you may consider taking out a policy with a longer premium payment period.
- Evaluate your risk-tolerance level if you choose a participating policy that pays non-guaranteed dividends or bonuses. The higher the potential return, the higher the risk. Some products may have a relatively low guaranteed payout but a high projected total payout (comprising the non-guaranteed part), which means a relatively high potential risk. To evaluate your risk-tolerance level, consider your age, investment attitude, and whether you have other assets. You may also make use of risk-profile questionnaires to better understand your risk appetite.
- Compare different products by referring to the following figures:
- Internal rate of return (IRR): In general, a higher IRR means a better return.
- Fulfillment ratio: A ratio of 100% means the actual payout was the same as that illustrated at the point of sale. If the fulfillment ratio is higher than 100%, it means the actual payout was higher than the illustrated amount at the point of sale, and vice versa. Refer to the Fulfillment Ratio webpage on the Insurance Authority website to learn more about how to calculate the fulfilment ratio and points to note when interpreting the figures.
Reminders
Do not blindly follow the choices of others
- Evaluate your personal needs and financial situation to choose an annuity with an appropriate insured sum, annuity period, premium level and risk level for your situation. Do not follow the choices of others without good reason.
- An annuity allows you to spend your retirement savings in a disciplined way to deal with the longevity risk. Young people should start saving and planning for their retirement early, while retirees should spend with discipline. Bear in mind that annuities are not growth-oriented, nor are they flexible. Do not make a direct comparison with investment tools like stocks and bonds.
- The income offered by most annuities comprises the non-guaranteed part. The actual amount of the non-guaranteed payout in the end may be higher or lower than the amount projected in the benefits illustration when you purchase the QDAP.
- An annuity is a long-term life insurance product. Early surrender or termination of the policy may result in a financial loss. If you terminate or surrender it at an early stage, the surrender value may be far less than the premiums paid.
- When choosing a QDAP, you should consider your long-term affordability, liquidity needs and retirement plan.
- Refer to the benefits illustration, which lists the surrender value (including the guaranteed and non-guaranteed parts), or the product brochure for the percentage of the surrender value over the paid premiums in the first year of the policy.
