New CPF Life Escalating Plan: Live to 95 to be better off?

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Will the new CPF Life plan be a better choice for you?

I refer to the article “Is the new CPF Life plan ideal for you” (Sunday Times, Oct 22).

It states that “A new CPF Life option – the Escalating Plan – will be available from Jan 1. This plan will be in addition to the CPF Life Standard Plan and Basic Plan. All CPF Life members can switch to the CPF Life Escalating Plan between January and December next year.”

As to “Q HOW LONG DOES IT TAKE FOR THE TOTAL PAYOUTS RECEIVED UNDER THE CPF LIFE ESCALATING PLAN TO BREAK EVEN WITH THOSE OF THE STANDARD PLAN?

A It will take a member about 25 years under the Escalating Plan to receive the same amount of cumulative payouts compared to the Standard Plan.

However, since the payout in the initial years is lower under the CPF Life Escalating Plan, the corresponding bequest (left for beneficiaries) during this period is higher” – does it mean that one has to reach about age 90, in order to “receive the same amount of cumulative payouts compared to the Standard Plan”?

Does this statement factor in the time value of money? If not – does it mean that one may have to live to age 95, 96 or whatever is the computed age – in order to be better off?

Are there any life annuity schemes in the world with escalating payouts which need one to reach such an advanced age, before one is arguably, better off?

With regard to “As part of a recent World Economic Forum Retirement Investment Systems Reform project, Singapore’s CPF Life scheme was profiled together with different case studies from various countries.

The report highlighted that with CPF’s interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

“This compares favourably with life annuities in most markets,” stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65″ – did the comparison take into account what I understand are our relatively very low bequests on death?

With regard to “The new Escalating Plan is designed for those with concerns over the rising cost of living and want their payouts to hedge against inflation.

Unlike the Standard and Basic plans, which offer monthly payouts that are level throughout a member’s life, the Escalating Plan’s payouts will increase at a fixed annual rate of 2 per cent, in return for a lower initial payout.

Note that if you are already receiving payouts under CPF Life and you need to switch to the new Escalating Plan, your new payout may be reduced by 20 per cent or more from your current payout.

This is based on independent and objective actuarial calculations, said the CPF Board” – why not make the subject actuarial report as well as all of the previous actuarial reports on CPF Life public?

“To receive a higher starting payout under the CPF Life Escalating Plan, members can top up their CPF Life premiums and/or delay their payout start age, up to age 70.

Starting later allows you to enjoy permanently payouts of up to 7 per cent higher for every year deferred. The option to delay payouts (up to age 70) until you need them is useful, especially for people still employed.

After all, 40 per cent of Singaporean residents aged 65 to 70 continue to receive work income. Thus, they may not need their CPF Life payouts at, say, age 65.

Q HOW LONG DOES IT TAKE FOR MY PAYOUT UNDER THE CPF LIFE ESCALATING PLAN TO REACH THE SAME PAYOUT LEVEL AS THE CPF LIFE BASIC AND STANDARD PLANS?

A For a male member who has an RA balance of $166,000 at the age of 55, and starts his payouts at age 65, the CPF Life Escalating Plan payout takes about nine years to reach the same payout level as the Basic Plan. It takes about 13 years to reach the same payout level as the Standard Plan.

For a female member who has the same RA balance at 55, and starts her payouts at 65, the Escalating Plan payout takes about 11 years to reach the same payout level as the Basic Plan. It takes about 14 years to reach the same payout level as the Standard Plan.

Beyond this period, both members will receive higher monthly payouts for the rest of their lives as their payouts continue to escalate annually.

After about 22 years, the monthly payout under the Escalating Plan for both the male and female members will be about 20 per cent higher than the payout under the level Standard Plan.”

 

Leong Sze Hian

 

 

About the Author

Leong
Leong Sze Hian has served as president of 4 professional bodies, honorary consul of 2 countries, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been a radio talkshow host, a newspaper daily columnist, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), invited to speak more than 200 times in over 30 countries, CIFA advisory board member, founding advisor to the Financial Planning Associations of Indonesia and Brunei. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.