CPF LIFE vs Commercial Annuity
Following the announcement of the changes to CPF LIFE and the release of some indicative numbers for the 4 CPF LIFE schemes, a question quickly came to mind: How does the commercial annuity compare to CPF LIFE? The following is a comparison of CPF LIFE and a leading commercial annuity.
The criteria are as follows:
- Male
- Single premium of $67,000 at age 55
- First payout at age 65
CPF LIFE Plans
Commercial Annuity Plan
CPF LIFE Plan VS Commercial Annuity
Note: Assuming that the commercial annuity plan and the CPF LIFE plans grows at the assumed interest rate
It has to be noted that the commercial annuity has no guaranteed min growth rate after the 2.5% interest rate during the deferred period (ie, the 10 years from age 55 to 65). In CPF LIFE’s case, there is a min interest rate of 3.5% for up to the first $60,000 in the SMRA and 2.5% in excess of that.
Assuming that the schemes perform as projected in their various assumptions, the commercial annuity may be competitive if it grows at 2%/pa. If it grows at 0.5%, it is unlikely to match any of the CPF LIFE plans in monthly payout. The bequest amount at age 70 is lower than the Balanced and Basic plan. However, I am assuming death occurs at the start of age 70. The amount will be lower if death occurs at the end of age 70.
Having said the above, not enough information has been released by CPF Board regarding the min payouts and bequests amount at different ages for the various CPF LIFE plans.
The pros and cons of the leading commercial annuity over CPF LIFE is as follows:
Pros
- The minimum payout can be established yearly as the bonus is guaranteed once declared. Eg, A bonus of $20.55 declared at age 65 will be guaranteed and the guaranteed monthly amount is $421.90. The monthly payout in CPF LIFE may decrease depending on the actual interest rate and mortality rate. Payout under CPF LIFE is not guaranteed.
- CPF Life only allows a maximum amount equivalent to the Minimum Sum to be committed to the scheme. Commercial annuity has much higher limits (if any).
- If bought using cash, it can be liquidated easily without much loss to the principal amount. Surrender option is unlikely to be available to CPF LIFE.
- There is no chance of losing the majority of the principal in the case of early death as the commercial plan will refund the balance of the unused amount. In LIFE Income plan, an early death will result in a ‘loss’.
Cons
- There is no min interest rate after the deferred period (if applicable). The CPF LIFE plans has a min interest rate.
- The starting min monthly payout is likely to be lower than even the lowest amount in CPF Basic plan.
- Commercial annuity holders are exposed to the credit risks of the provider.
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