CPF payouts 'fall short for higher-income earners'

A Standard & Poor's study found that 67 per cent of men in Singapore are financially literate compared with 52 per cent of women. This indicates that men here are more likely to have the financial know-how to create alternative sources of income in r
A Standard & Poor's study found that 67 per cent of men in Singapore are financially literate compared with 52 per cent of women. This indicates that men here are more likely to have the financial know-how to create alternative sources of income in retirement.SUNDAY TIMES FILE PHOTO

Mid- to high-income earners will need sources of capital in addition to their Central Provident Fund (CPF) payouts to maintain their lifestyles in retirement, according to a new study.

And a separate survey has found that Singapore men are more likely than women to have the financial know-how to create alternative sources of income in retirement.

Ms Brigitte Miksa, head of international pensions at Allianz Asset Management, said the Organisation for Economic Cooperation and Development (OECD) estimates that 60 to 70 per cent of a pre-retirement income is needed to maintain a person's lifestyle after he stops work.

However, men in the 50th and 70th income percentiles here would not receive these amounts if the average full balance in their CPF accounts was paid out in the form of annuities, she said. Allianz used an OECD approach to derive the annuity payments.

A man earning the 50th percentile income would get just 56.9 per cent of pre-retirement income, based on such payouts alone, Ms Miksa said.

And the picture is worse for a man whose income is at the 70th percentile. He would get 49.9 per cent of pre-retirement income.

When payouts are derived from the CPF minimum sum instead of the full amount in the account, these retirees fall even further short of the 60 to 70 per cent.

Men at the 30th income percentile, however, could achieve a gross replacement rate of 71.3 per cent by annuitising the full amounts in their CPF accounts, Ms Miksa noted. This suggests that lower-income earners could rely on CPF payouts for retirement income.

"If you, as a high-income earner, draw your income from the CPF, you will certainly have to have more income sources to maintain your living standard," she said.

Allianz said Singapore "ranks pretty low" in retirement income adequacy, though it is ahead of many Asian counterparts, such as China, Hong Kong and Malaysia.

It arrived at this assessment by weighing expected retirement incomes against expense needs, especially healthcare.

The Munich-based insurer considered various sources of retirement income, such as state and workplace pension schemes, family support, wealth and informal employment. It also looked at life expectancy.

Singapore scored lowly on retirement income adequacy due to "the lack of a social safety net" and having "one of the highest out-of-pocket healthcare costs in the world", Allianz said.

Singapore retirees' heavy dependence on family support for income brought another risk, Ms Miksa said, noting that in 2010, about 60 per cent of retiree income came from family support. With Singaporeans living longer, the burden on the younger generation would increase.

"If you have more elderly than kids because of a longevity increase, you have to support your parents, grandparents and, maybe, even your great-grandparents," she said.

Another risk to retirement income adequacy came from the fact that property is the largest asset class here, with home ownership at around 90.5 per cent.

There is a risk a person might not be able to turn this asset into cash in a time of need, Ms Miksa said.

Singaporean men are more likely to have the edge over women when it comes to investing to bolster retirement income, according to a study by Standard & Poor's (S&P). The ratings agency's survey found that 67 per cent of men are financially literate compared with 52 per cent of women.

"The potential benefits of financial literacy are manifold. People with strong financial skills do a better job planning and saving for retirement," S&P noted. "(They) have the ability to make informed financial choices regarding saving, investing, borrowing, and more."

Financial literacy was measured by testing more than 150,000 adults in more than 140 countries on their knowledge of four basic financial concepts: numeracy, risk diversification, inflation and compound interest.

The survey found that men were more financially literate than women in "virtually every country". Worldwide, the average gap is about five percentage points.

Singapore is home to the highest percentage of financially literate adults (59 per cent) in Asia. It is placed 12th in the world.

A version of this article appeared in the print edition of The Sunday Times on December 06, 2015, with the headline 'CPF payouts 'fall short for higher-income earners''. Print Edition | Subscribe