About Life Annuity

Editor
Today Paper

I refer to the letter entitled "Annuity conumdrum if I die early" by Lim Boon Hee (Today, 27 September).

Under the CPF Minimum Sum Scheme, a retiree is allowed to invest the minimum sum of $90,000 in a life annuity plan at age 55 and to receive the annuity payment from age 62.

Mr Lim asked what happens if the annuitant dies before age 62 (without receiving any payment) or at age 65 (after receiving only a part of the $90,000). Will the annuitant lose part or all of the $90,000?

Under the annuity plan now offered by NTUC Income, we will refund back the balance of the $90,000 with interest up to age 62, after deducting any payment that has been received by the annuitant. If death occurs before age 62, we will refund back $90,000 with interest. If death occurs after age 62 and the annuitant has received $20,000 (say), we will refund back $70,000 with interest earned up to age 62.

The annuitant will only lose the interest after age 62. This interest is left in the annuity fund to benefit the annuitants who live longer. The life annuity will continue to be payable for the lifetime of the annuitant, even if the annuitant lives beyond age 90 or 95 years.

If the retiree leaves the money in the CPF to earn interest at 4% per annum and takes out the monthly sum allowed by CPF, the minimum sum will be fully used up by age 82. After age 82, the retiree will have no further source of income.

With longer life expectancy, many people are expected to live beyond age 82. We can see many people around, who have lived beyond that age.

About 28,000 people have invested in a life annuity from NTUC Income. They realise the benefit of this type of insurance product. They do not wish to take the risk of living too long, and running out of money. We provide about 65% of all life annuity in Singapore.

If the retiree wish to leave behind some money for their family, they probably have a property and perhaps other savings or assets.

Tan Kin Lian
Chief Executive Officer
NTUC Income

NTUC's plan for low income workers

NTUC has suggested that workers earning less than $1,000 be exempted from CPF. This will save them 20% of their wages. They need the full wages to meet a basic lifestyle, due to the high cost of living in Singapore.

NTUC suggested that the government should top up the CPF savings of these low income workers, so that they can buy their HDB flat.

I think that this is a wonderful idea.

In some countries, the government pays people who do not work. It is called unemployment benefit.

The approach by NTUC is to encourage these unemployed workers to work, even if it is a low income job. The government can help them by contributing to their CPF savings. It is an indirect way to give some help to these workers, but they must work.

Wrong way to attract people to attend a seminar

I attended a seminar recently on investment-linked product. It was organised by a few important organisations.

There was no charge for the seminar. More than 500 people attended.

The organiser gave an attractive goodie bag (worth $15) and a sumptious meal (worth another $15). Some of the attendees appear to be regular attendees at these seminars.

Do we need to spend so much money to organise the seminar? Are we attracting the wrong people who attend for the wrong reason?

Reply to: Policies similar but returns differ

Editor
Forum Page
Straits Times

I refer to the letter from Mdm Dorothy Ballard entitled "Policies similar but returns differ" (Straits Times, 11 Aug 2005).

Mdm Ballard said that the endowment policy that she bought from NTUC Income 20 years ago gave a return on maturity of 5.47 percent compounded annually. A similar policy taken from another insurer gave a lower return of 4.29 per cent.

This difference in return, compounded over 20 years, produces a 14% higher payout from NTUC Income.

I wish to explain why it is possible for NTUC Income to give a better return to our policyholders:

- we are a cooperative society
- we pay lower commission to our insurance agent
- we keep our salaries and expenses at a modest level
- our shareholders receive a modest rate of dividend.

By spending less, we are able to give a better return to our policyholders through lower premium or higher bonus. This can amount to a lot of money over many years.

Many people think that the key factor is skill in investment management. This is not so. Over a period of years, most large sized funds will produce an average rate of return that reflect the economic fundamentals.

We hope to convince Mdm Bollard and other policyholders that it does matter who they choose to invest their long term savings with, and that they will choose a well managed cooperative.

Tan Kin Lian
Chief Executive Officer
NTUC Income

Add a term rider to your Ideal plan (ILP)

Add a term rider (LTA or DTA) to an Ideal plan. It should be 20 years of savings. For example, if the policyholder wish to save $250 a month, the term rider can be for $60,000.

Under LTA (level term assurance), the term rider pays $60,000 on death during 20 years, plus the saving in the Ideal plan. After 20 years, the rider expires, and the accumulated savings (which is $60,000 plus gains) will be paid.

Under DTA (decreasing term assurance), the term rider pays $60,000 reducing by $3000 each year over 20 years, plus the savings in the Ideal plan. Although the term rider reduces yearly it is more than offset by the additional savings in the year.

On death at any time, the total payout (including the savings in the Ideal plan) should be more than $60,000.

The annual premium is:

Entry  -- Male --    -- Female -
Age     LTA   DTA      LTA   DTA    

25       84    42       55    25    
35      211    85      139    57    
45      686   290      455   190

The premium rate for DTA is less than half of LTA. The cost difference is more significant at the higher entry ages.

The premium rate for female is about one-third lower than males.

The annual cost of LTA and DTA at the younger entry ages (ie less than 35) is less than $200, and is highly affordable.

RECOMMENDATION: Add a LTA or DTA to our Ideal plan. The premium is level and does not increase with age.

Training Bond

New employees joining NTUC Income is required to sign an agreement to pay us back one month's salary if they leave our service within the first year.

This is a training bond. It is intended to compensate us for the cost of training the new employee. Our actual cost is much higher.

We have implemented this condition for the past five years. It has produced an unexpected benefit. A new employee who is not serious about joining us will not accept our job offer. Those who accept our offer are serious about making a career with us.

This is an effective "selection process". We get the right employee to join us. We enjoy a low turnover rate, and reduced wastage in recruiting and training the wrong people.

We have a few cases where the new employee is not suitable for the job. We ask the employee to leave and waive the training bond.

Singapore has adequate talent

I often hear the remark, "Singapore is short of talent".

I disagree. We have adequate talent. However, they are not well used.

We have many well educated people. Look at the number of graduates, including those who have pursued university degrees on their own. We have many MBAs.

The problem is: are they able to apply their knowledge well? The answer is, "many people are over-educated and under-utilised".

If they learn how to apply their knowledge effectively, we will have more than sufficient talent.

Pay an adequate hourly rate

I found, to my surprise, that casual workers are paid as low as $3 an hour, for example, at fast food outlets.

If they work for 8 hours a day, they earn only $500 a month. This is too low to make a living. The cost of living is quite high.

I suggest that the minimum wage should be at least $6 an hour. A person working 8 hours a day should earn about $1,000 a month all-in.

Maybe $6 is still inadequate, but it is better than $3.

Digital navigation system a hazard?

Editor
Forum Page
Straits Times

I refer to the letter entitled "Digital navigation system a hazard?" by Michael Yeo Khee Hiang (St Times, 10 Sept).

I have tried a few PDA and PC-based navigation systems in my car over the past 12 months.

They are very useful and quite safe to use. All provide clear voice directions and do not require the driver to watch the video screen.

By giving directions earlier, it helps the driver to keep to the correct lane and drive more carefully. It avoids accidents due to unfamiliarity with the roads.

It may take a new user a few days to get used to the system. During the initial period, the problem raised by Michael Yeo could arise. But, the benefit will accrue after that.

I encourage more cars to be installed with the navigation system to promote safe driving.

Tan Kin Lian
(sent in my personal capacity)

Car sharing for newly qualified drivers?

The Editor
ST Online
9 September 2005

I refer to the letter from Tan Tiong Heng (ST Forum Online 8 Sep 2005).

NTUC Income operates the car sharing scheme to provide an afforable means for its members to share the use of the cars owned by the cooperative. We operate a fleet of 180 cars located at 70 convenient locations. The current fleet serves 5,200 members.

At present, we impose a condition that a member must have at least 30 months of driving experience. This is to reduce the incidence of accidents. If there are many accidents, the cars will not be available and will adversely affect the quality of service to other members.

New drivers can borrow a car from family members, friends or colleagues. They also often benefit from being accompanied by another experienced driver while practising.

We do not think it is suitable for the car cooperative to mix the needs of new drivers with the general needs of our members. Nevertheless, we do adopt a flexible approach and will be prepared to waive the 30 month bar if the applicant can demonstrate his car handling capability.

We have taken note of the views of Mr Tan. We will see if we can set aside a few additional cars to serve the needs of newly qualified drivers.

Lewis Chen
General Manager
NTUC Income Car Co-Op

Risk is to your advantage

I advise investors to invest in a large, well diversified mutual fund, such as the combined fund operated by NTUC Income. They ask, "is it risky?"

I reply, "yes, but risk is to your advantage". Here is my reason:

- if you invest $100,000 to earn 2.5% for 10 years (ie a safe investment), you will get $128,000

- if you invest to earn 6% (ie a risky investment), you will get $178,000.

- risk can work both ways - you can get more or les than $178,000 at the end of 10 years

- if you get more than $178,000, you can realise your investment

- if the market is bad and you get less than $178,000, you can wait 1, 2 or 3 years for a better time to realise your investment

- risk is to your advantage, if you can wait for the right time to realise your investment.

Many people who attend my educational seminar agree with my statement, "Risk is to your advantage". They choose a fund that has a higher proportion invested in equities.

A wonderful message

A reader of my blog sent me this wonderful message:

Dear Mr Tan

Thanks for putting in the extra effort in writing a blog. Yours is very informative and straight to the point. No nonsense, short and sweet. It's the best I have ever come across.

Fuel Subsidy

Poor countries face a dilemma with rising oil prices.

If the government keeps the domestic price low, they bear the cost of the subsidy. Their people can take advantage of the subsidised price and buy more and make a profit from re-selling the fuel.

If they adjust the price to reflect the world market price, the ordinary people cannot afford the higher price.

What should they do?

Trading in Structured Warrants

Dr Larry Haverkamp wrote an article in Business Times. He said:

- many people are trading a lot of money in structured warrants
- last month the amount was $1 billion, representing 20 per cent of the stock exchange’s total trading volume
- structured warrants are a "zero-sum" game; for every $1 million won by some people, others will lose $1 million.

Dr Haverkamp also told me separately:

- the structured warrants are created by the issuing banks
- they set its price at issuance
- issuing banks are also the market-makers
- they do not reveal how much they charge for issuing the warrants OR for market-making

I have never invested in structured warrants, structured deposits and other complicated products. Without full disclosure of their costs, I prefer to avoid them.

I favour to invest in unit trusts that offer low charges. The investments are likely to earn an average of 5% to 8% per annum over the future. If the charges are less than 1%, I will be able to keep most of the profit for myself.

Handle issues at the proper level

As the CEO, I am available to my customers. I give my e-mail address for them to contact me directly.

Some of our customers are not considerate. They will ask me to handle an issue that can be handled through my colleague.

Here is an example. A policyholder receives a bill that he has already settled. He sends me a complaint that "the bill has already been settled".

My reply to the customer: "I believe that the bill tells you where you can call to make an enquiry. Frankly, I am the CEO but not the person who handles every enquiry. I will pass your enquiry to my officer. "

I hope that people can be more considerate.