This article was originally written in 8 July 2014 and has been updated to reflect the latest changes.
Question: "Wilfred, can you take a few minutes to look at an example of a CPF life annuity plan generated using the CPF LIFE Payout Estimator? A typical screenshot is as attached. Look at the big gap between the bequest amount and the little difference in the monthly payout. Did I overlook something as the Basic plan seem much more 'superior' than standard plan." - From AM Tan (a financial adviser)
Answer: Yes, the CPF Life Basic plan appears to be more superior.
The Internal Rate of Return of CPF LIfe
The Internal Rate of Return or IRR is a measurable of how good or bad an investment is. Let's say the IRR of X is 4% while the fixed deposit is 1%, it implies that X is a better deal. This assumes X and fixed deposits are identical in all aspect except for its IRR.
Based on the above quotation from CPF, for the CPF LIfe Standard Plan of single premium $249,000 at age 55 and payout starting at 65 for $1754 every month for 20 years (assuming dies at 85) and the bequest at the end of the payout period is $0, the internal rate of return is 2.73% per annum. As for the upper limit of the projected payout, the return is 3.29% per annum - this assumes a projected payout of $1944 and a projected bequest of $0.
As for the CPF Life Basic Plan, for the single premium $249,000 at age 55 and payout starting at 65 for $1658 every month for 20 years (i.e. assuming dies at 85) and the bequest at the end of the payout period is $151,613, the internal rate of return is 3.68%per annum. As for the upper limit of the projected payout, the return is 4.17% per annum. This assumes a projected payout of $1,842 and a projected bequest of $162,563.
So it can be seen that CPF Life Basic Plan is superior in terms of its IRR as compared to the CPF Life Standard Plan.
Its unfortunate that there is no figures given on how much the bequest for the CPF Life Basic Plan would be between 86 to 94. Hence, it is not possible to calculate the IRR for the CPF Life Basic from 86 to 94.. What we do know is that CPF Life Basic has two portion: The 90% of the initial premium stays in the CPF-RA while 10% is invested into the annuity pool. From 65 to 90, the monthly amount will be drawn from the CPF-RA. By the time the CPF Life member reaches 90, the CPF-RA would be zero and the annuity portion starts at 90 years old onwards. Assuming a person kicks the bucket at exactly 90 years old, there is still a cash value for this annuity. The cash value is equivalent to the amount that was previously deducted (10%) but without interest. So we can assume the bequest at age 90 for CPF Life is $24,900 using the above example. So let's recalculate on what happens if the CPF Life dies at age 90.
For the single premium $249,000 invested in CPF Life Standard at age 55 and payout starting at 65 for $1,754 every month for 25 years and the bequest at the end of the payout period is $0, the internal rate of return is 3.53% per annum. As for the upper limit of the projected payout, the return is 4.05% per annum assuming a projected payout of $1,944 and a projected bequest of $0.
As for CPF Life Basic, for the single premium $249,000 at age 55 and payout starting at 65 for $1658 every month for 25 years and the bequest at the end of the payout period is $24,900, the internal rate of return is 3.41% per annum. As for the upper limit of the projected payout, the return is 3.91% per annum. This assumes a projected payout of $1842 and a projected bequest of $24,900.
Below is a table of summary of the various returns figure assuming you opt for the CPF Life at 55 years old.
|Assuming you opt for these plans at 55||Dies at 85||Dies at 90|
|CPF Life Basic||3.68% - 4.17%||3.41% - 3.91%|
|CPF Life Standard||2.73% - 3.29%||3.53% - 4.05%|
It can be seen from the above that the CPF Life Basic Plan is superior if the life expectancy is 85 or below. However, the CPF Life Standard Plan is only marginally better at 90.
Possible explanation why CPF Life Standard returns are poor
The ‘poor’ returns of CPF Life Standard is due to the fact that all of the CPF RA is being invested into the common insurance pool while only a small amount (10%) of CPF RA under CPF Life Basic goes to the insurance common pool. The seemingly poor return is due to the ‘penalty’ of early exit from the pool in order to help subsidise the remaining in the pool who live too long. This is how insurance works through risk pooling. Unfortunately, we do not know whether this risk pooling is efficient as there is no further benefit illustration available. What we do know is that the interest earned in this insurance pool is not refunded upon death.
CPF Life Basic is more transparent
Personally, I recommend CPF Life Basic to all my clients partly because the IRR is likely to be higher than Standard Plan and also because CPF Life Basic is more transparent.
For CPF Life Basic, 90% of the money is still residing in the CPF Member's CPF Retirement Account. The CPF Member can see for himself all the transactions and interests earned in that account. On the other hand, the entire CPF-RA is deducted and invested into the annuity pool under CPF Life Standard Plan. It is like a blackbox and nobody knows what's going on. I also do not know where to get the report on the financials of this annuity pool.
It is important to note that the CPF Life Standard is the default plan. This means if the CPF Member do not do anything, the CPF Member will be automatically opt-ed into the worst of the two plans eventually! Of course, if the CPF Member thinks he will live beyond 90 and is not concern with transparency, the default CPF Life Standard is the better option.
Want to know more about CPF Life?
If you want find out more about CPF Life, may I invite you to download the Full Report on CPF Life just updated as at 22 June 2017. This report is available to subscribers and will answer the following questions:
- Can I still service my housing loan using CPF after I turn 55?
- Can I choose how much of my savings to use for CPF LIFE?
- Can I pledge my property?
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