CPF Life Annuity - good or bad?

Many people ask me for guidance on whether they should take up the CPF Life Annuity. How does it compare with the Retirement Account and a life annuity from an insurance company?

Here are the key facts:

1. The CPF Life pays the annuity for life and gives a small bequest to the beneficiary on death prior during the initial period (which varies according to the annuity option. The Retirement Account pays a higher payment and runs out after 20 years. The balance of the account is payable to the beneficiary on death during the 20 years.

2. The difference between CPF Life and Retirement Account depends on how long you live. As you do not know, there is no point in trying to do the calculation of "which is better". The actuary for CPF will do the calculation based on the average lifespan. You cannot be smarter than the actuary.

3. As the actuarial calculation is based on the average life expectancy of people in good health, you should avoid the CPF Life annuity if you know that you are in poor health.

4. There is a bonus payable to most people who take up the CPF Life annuity, so if you are given a bonus, it is better to opt for the CPF Life. If you find the bonus to be too small, say less than 5% of the invested sum, it may be better for you to stay with the Retirement Account.

5. The underlying yield for CPF Life and the Retirement Account is the same, i.e. 4% per annum. This is higher than the underlying yield payable by a life annuity from an insurance company. So, it is better to keep your money with CPF, either in CPF Life or the Retirement Account.

The CPF Life is an example of many complicated schemes that have been introduced by our Government. The general public is confused. This is made worse by the nature of Singaporeans, who are generally quite naive financially, but they like to seek advice from the wrong people on "which is better". As the calculation involve many possible scenarios, it is not possible to get the "right answer".

I hope that the Government will sort out this mess and make things simpler for the citizens, rather than leave the mess  to cause a lot of confusion.

Tan Kin Lian