This post is specially for my Singapore readers (or anyone with vested interest with CPF monies in Singapore).
A few days ago, our government has released details of the new annuity scheme for us. They have nicely called it The National Lifelong Income Scheme.
The scheme is flexible with different payout dates available. If you are rushing to change your default scheme from”Refund 80″ to “Refund 65”, please read this post carefully first.
Refund 65 means 100% of your retirement account (RA) will be used to pay the annuity premiums and you start getting paid from the annuity from age 65.
After you die, you only get back your premiums minus what you have already received.
If you go for the refund 80 option, 24% (28% for females) of your RA is used to pay the premiums. If you go for the refund 90 option, the percentage drops to even lower at 6% (8% for females).
You will still get money from age 65-79 but they will be funded from your RA. Your RA continues to earn interest in the meantime.
If you die anytime before 80, you get back your premiums plus any balance in your RA. If you die after 80, you get back your premiums minus what you have already received from age 90 onwards.
The critical difference between the 2 cases is that your RA will earn interest but in the case of refund 65, you earn no interest since everything is thrown into the premiums.
The bottomline is that if you die early, your loss is the “interest” you would have earned from the annuity premiums. As an example, for someone who opts for the refund 65 and dies at age 65, he would have lost 4% interest compounded over 10 years (or 48%) which is about half of his minimum sum. Based on a minimum sum of 120k, his inheritance will get back only 120k instead of about 180k.
Unfortunately, many man in the street will go for the refund 65 option with the thinking they do not want to lock up their money until 80. This option however, leads to the greatest “interest loss”.
As for whether the “norefund” schemes are worth considering, I can only comment after details have been released. As of now, I would personally go for the “Refund 90” option to minimize the interest loss.
For more details on the scheme, you can refer to the MOM website.