A policyholder asked me if he should keep the life annuity or encash it and re-invest the money in another investment.

Here is my suggestion.

The life annuity provides a monthly return of $500 ($6,000 a year) from the re-investment of the accumulated sum of $130,000 at age 60.

It is a guaranteed life annuity (but the benefit illustration does not state what the guaranteed period is). It pays the annuity for a lifetime, but if death occurs within the guaranteed period, it will continue to pay for the rest of the guaranteed period. It does not pay the annuity permanently, as the annuitant stated earlier.

I assume that the period of payment will be for 25 years, on average. It could be shorter than 25 years or longer, so the 25 years is an average.

Based on 25 years, the yield of the annuity is 1.2% per annum. This takes into account the depletion of the capital of $130,000 over the average of 25 years.

As this is a participating annuity, the payout will increase with bonus which depends on the investment income of the fund.

I do not know what the increase is likely to be, but I estimate that a reasonable average could be 1.5% per annum. This will increase the return on the annuity to 2.7% per annum.

The question that you can consider is - can you invest the cash value of $130,000 to get a better return than 2.7% p.a.?

Here are the options:

a) Buy a new investment plan proposed by the agent. You can send the benefit illustration to me. I can analyse it and see if it does give you a better return than 2.7%

b) Put the $130,000 into the CPF special account. It will earn you 4% per annum. When it is converted into a life annuity (i.e. CPF life), the return should also be 4% per annum.

c) Invest the $130,000 in an index fund, such as the STI ETF. The average return over the past 10 years was 5.22%. It used to be 8% previously, but it has reduced to 5.22% due to a weaker stockmarket.

See this webpage. https://sg.finance.yahoo.com/quote/ES3.SI/performance/

d) Continue the existing annuity to earn an average of 2.7% p.a.

Here are more information about

investing in the STI ETF:

I asked him to visit my office and have a discussion about the options.

Tan Kin Lian