Annuities... how do they work?
August 23, 2007 1:29am CST
Annuities... they are the talk of town of late after the Prime Minister announced that all those who are below 50 from 1 Jan onwards are made compulsory to buy annuities. how do they work exactly? For a person who is interested to get a payout of $400 a month at the age of 85, how much must a person who is currently under 50 pay? How long must he pay this amount for before he can start drawing on the payout? Is an annuity the same as some of the cash back programs offered by Prudential and Standard Chartered? If this is so, what difference is the annuity different from the fixed deposits or insurance cashback? Any gurus out there can help?
23 Aug 07
Well, the main difference for an annuity is that payments are for life. not for as long as your premium lasts, or as long as your premium plus interest lasts. so the insurance company is taking on the longevity risk. which means that if people live longer than they calculated at the time when they charge the premiums and promise a rate of monthly payout, then they will have to fund the difference. longevity risk is a big risk. in fact many companies that offered annuities in the 1980s and 1970s would be going bust by now because they did not expect people to live so long. not so sure about the quantum questions, like how much premium is required now for $400 a month payout at 85.
23 Aug 07
lots of companies i think. prudential probably provides as our friend above indicates. and ntuc income has been in the news citing how their annuity is quite good. and i think great eastern provides too. yah right now it's lump sum. but those retirees will have a sizeable lump sum. it's us poor folks who just bought house that have next to nothing.