I just came back from a public seminar organized by CPF Board on CPF Life held in DBS Auditorium. I attended it because I need to be familiar with the scheme in order to advice my clients. Ideally CPF Board should organize a specialized training for financial planners but I figured that they cannot be bothered because financial advisers and planners wouldn’t be interested to attend since there is nothing to earn for advising on CPF Life.
For the first 20 minutes, CPF Board played a video which is basically a marketing video on CPF Life. After that the speaker went through the important points on CPF Life which was already published widely in local media and internet. What follows was Q&A which was the most interesting. The following was what I can remember based on the notes I noted down and from my rusty grey matter (call the Brain):
Question: Is the monthly payout from CPF Life protected from creditor?
CPF Board: Yes.
(My comment: Cool!)
Question: The monthly payout quoted is a range. Is the lower end of the range guaranteed?
CPF Board: No. The range quoted is based on 3.75% - 4.25% interest rate. If the interest rate goes below 3.75%, the monthly payout can go lower. If life expectancy of the pool increases, the monthly payout will also be affected.
Question: Like this than how to plan if the monthly payout minimum amount is not guaranteed? [Applause from the audience]
CPF Board: The government guarantees a minimum interest rate of 2.5%.
Question: You still haven’t answer my question, how to plan if the monthly payout minimum limit is not guaranteed? I bought an annuity plan from a private insurer and is considering to terminate it to buy CPF Life. My annuity plan provides a minimum guaranteed payout but yours don’t. My insurance company said that you may give high payout on the first year but reducing it on the subsequent years.
CPF Board: If you ask your insurance agent, he will tell you CPF Life is not good because he doesn’t want you to withdraw your annuity plan.
(My comment: This is a horrible reply by CPF Board. Not professional. As civil servants, they should not be pro or anti anyone although what the CPF Board staff said isn’t entirely false but definitely not entirely the truth. They should leave insurance agent bashing to others like me!)
Question: Since the minimum guaranteed interest rate is 2.5%, why don’t you quote ranges based on 2.5% - 4.25%?
CPF Board: If we quote 2.5% - 4.25%, everybody will focus on the 2.5% which is low. The 3.75% - 4.25% is based on the average 4% which is a realistic figure which people can expect.
Question: I have been getting 4% [on my RA] all along. So it means 4% is quite guarantee?
CPF Board: The government guarantees 2.5% only.
Question: So like that how to plan?
CPF Board: We will make sure the adjustment is small and we will notify CPF members in advanced before the adjustment.
[All the questions above were asked by one fellow who were eventually asked (in a very nice and tactful manner) to stop asking so as to allow others to ask. ]
Question: Can I top up my RA beyond the Minimum Sum so that I can buy more in CPF Life?
CPF Board: No. But the Minimum Sum (MS) is increasing every year. So you can top-up when the MS is increased.
Question: Why don’t you allow people to buy more CPF Life?
CPF Board: Rumble rumble (I cannot remember the reply)
Question: Can I buy an annuity plan from private insurer and get exempted from CPF Life?
CPF Board: Yes if the annuity product is comparable with CPF Life. You can write in to get exemption.
Question: You all ha did not account for the real value of the monthly payout. By 10 or 15 years time, the monthly payout real value is only $100 per month. How am I going to live with $100 each month?
CPF Board: We had considered inflation-indexed payout. If we want inflated-indexed payout, there will be a trade off of higher premium and reduced payout. Moreover, not everybody will benefit from it as the initial payout is low. We decided not to inflation-indexed the payout after considering the trade off.
Question: You still haven’t answered my question, how am I going to live just based on a $100 per month?
CPF Board: CPF Life is not meant to cover all expenses. You need to additional supplements.
There were a number of questions related to interest accrued:
Question: What happens to my interest in my RA account? Are all the interest taken by CPF as management fees?
CPF Board: Prior to joining the CPF Life, all interest remains in the RA. CPF Life’s expense will be low due to the economy of scale.
Question: What happens to my interest if I join CPF Life?
CPF Life Income Plan (no interest will be refunded on bequest)
CPF Life Plus Plan (no interest will be refunded on bequest)
CPF Life Balanced Plan (partial interest will be refunded on bequest)
CPF Life Basic Plan (full interest will be refunded on bequest)
[My comment: The above were asked a few times but the answers given were piece meal. So the above interest refund amount may not be entirely correct. Moreover, this “interest” that CPF Board was referring to is likely the accrued interest during the deferred period. I believe all interest accrued after the draw down age is not refunded as it is remained in the pool]
Question: What is the bequest amount?
CPF Board: For CPF Life Income Plan, there is no bequest amount. For the remaining 3 refundable plan, the bequest amount is ‘roughly’ capital less amount already paid out.
There was also some complains that the payout estimator on the CPF website needs to be improved. Also there was request that CPF Board should give a similar benefit illustration like private insurer.
My further comment on the matter after coming home: The CPF Life will eventually be a compulsory scheme. So eventually everybody is affected. To me CPF Life is a Complex product which should be more tightly regulated by MAS. However, MAS does not regulate this product. I say CPF Life is a complex product based on the following basis:
1. The underlying fund is invested in “special government bonds.” What are these “special” government bonds? Are these bonds regulated securities like SGS? I doubt so. Lehman Minibonds are also quite “special” in that sense. Are these “special bonds” meant to provide cheap capital for Temasek and GIC? If so, can Temasek and GIC provide a higher interest guarantee interest say at 5% rather than a miserable 2.5%?
2. Unlike traditional annuity, nothing is guaranteed in the scheme. Of greatest concerned voiced by many in the audience was that there is no minimum guarantee payout. The bequest amount is also a function of the interest accured which was quite fuzzy as to how of this interest is refunded and whether is it referring to the accrued interest during deferred period of for life?
3. One of the audience question on that he cannot live for $100 of real value per month in 15 years time was not satisfactory answered. This is a serious question but as the monthly payout is not inflation-indexed, it means that the payout is decreasing over a long term basis.
4. The purchase of CPF Life is irreversible unlike traditional annuity plan.
Nevertheless there one point which some people like – that the CPF Life is managed by government. Unlike most private insurers that have been cutting bonuses and spending super high expenditure such as logo-change and new image branding exercise for no good reason, there is a very good chance that CPF Life will do better than these ill-behavior private insurers.
There are 4 plans to choose from. There is no model answer as to which plan is the best as it depends on individual needs. I’ve a relative who asked me whether should she top-up her RA and buy CPF Life. My advice to her is NO because she has no medical insurance. So if she is sick and require hospitalization, she need CASH to pay her medical bills. If she use up most of her cash to buy CPF Life, the decision is irreversible and she will not have any money for medical. Therefore, the choice on
- Whether to top-up RA to buy more CPF Life;
- Whether to select the highest payout to the lowest payout;
- Whether to buy a private annuity in order to be exempted from CPF Life
are all depend on each person’s situation.
Therefore, anyone who would like to make a sound decision on CPF Life can come to me under Comprehensive Financial Planning (I can’t offer this under Simple Financial Planning as it is obviously not ‘simple’) Needless to say I’ll definitely charge a financial planning fee for this without exemption.
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