Retirement income products: The flavour of the times

There are many insurance products, for instance, structured as an all-in-one savings endowment plus income distribution in retirement.
There are many insurance products, for instance, structured as an all-in-one savings endowment plus income distribution in retirement.PHOTO: ST FILE

There are many insurance products structured as an all-in-one savings endowment plus income distribution in retirement, as well as unit trusts with income distribution

The need for income in retirement is surely one that causes anxiety to savers. If you have managed to accumulate a sizeable lump sum by your 60s, that is a feat.

But the next challenge is: What do you invest in that will yield a regular income, incur minimum volatility and hopefully, also the smallest of downside risks?

There are a number of lower-risk options. These include the Singapore Savings Bond (SSB). The latest issue in April has a 10-year interest rate of 2.16 per cent on a compounded basis, which is just a tad short of the 10-year Singapore government bond (2.2 per cent).

And of course you cannot ignore the Central Provident Fund (CPF) Life scheme, which pays an annuity for life and has the highest payout for every dollar committed compared to private annuities.

The good news is there seems to be no shortage of choice for those who want income. There are many insurance products, for instance, structured as an all-in-one savings endowment plus income distribution in retirement. There are also unit trusts with income distribution as their main objective. Some pay an income of more than 5 per cent a year.

The sensible route would be to spread your options - have some in CPF Life, insurance, unit trusts and SSB. This column presents some of the choices among insurance and funds, and issues that you should be mindful of.

INSURANCE PRODUCTS

 Insurance endowments which provide an income in retirement are proving to be popular. Based on data from the Life Insurance Association, there was a nearly 50 per cent increase in the number of such policies taken up last year. In terms of weighted premiums, retirement income policies generated around $338 million in new business last year, a rise of almost 60 per cent from 2017, and more than double the $163 million raised in 2016.

Retirement income products are typically with-profits, that is, they are structured as endowments with a combination of guaranteed and non-guaranteed income.

The guarantee is likely a reason for the product's growing popularity, as well as the fact that the plans' illustrated total benefits may be substantial. For this column, the writer requested from select insurers, benefit illustrations (BIs) for a 45-year-old male, for a guaranteed monthly income in retirement of $1,000, with monthly payouts to begin at 66. The retirement age is assumed to be 65.

As with all traditional participating plans, the BIs are illustrated based on two projected rates of return of 3.25 and 4.75 per cent. These are hypothetical and do not mean that the policy experiences no volatility. Policyholders are shielded from volatility by the practice of smoothening of returns, where not all surpluses are declared as bonuses in a good year. This leaves a cushion to declare a bonus when the going gets rough.

For the plans, the base payout of $1,000 a month is guaranteed. The BIs reflect the non-guaranteed income as well, which may be expressed as "cash bonus" or dividends. For AIA, the Retirement Saver policy's non-guaranteed payouts are expressed as a monthly dividend plus terminal dividend. Some plans, such as GE's, also project a larger payout in the final year.

If the policyholder chooses not to receive the payout, but to let the premiums and benefits continue to accrue with the insurer, the monies would earn an interest rate. Income quotes the interest rates at 1.75 per cent, assuming an illustrated return rate of 3.25 per cent. Under the illustrated 4.75 per cent scenario, the funds would earn an interest rate of 3.25 per cent.

Under the accumulation scenario where the policyholder chooses not to receive the monthly cash benefit, other insurers' interest rates may be relatively lower at 1.5 and 3 per cent, for the respective theoretical illustrated return rates of 3.25 and 4.75 per cent.

The big question is whether the benefit projections can be fulfilled. For an idea, you could look into the insurer's credit rating, the historical rates of return and expense ratios, and the illustrated yield at maturity.

For example, Income's BI says at a headline illustrated rate of 3.25 per cent, the yield at maturity would be 2.71 per cent. With the 4.75 per cent scenario, the yield at maturity would be 4.05 per cent.

The average return generated by Income's par fund over the past 10 years is 3.51 per cent, after investment expenses. This suggests that the more conservative yield at maturity may be achievable.

Prudential's illustration for its PruGolden Retirement says that the policy yield at maturity is expected to be 2.6 and 4.04 per cent, based on illustrative rates of 3.25 and 4.75 per cent, respectively. Pru's 10-year investment rate of return is 4.12 per cent a year.

Ultimately, however, even if an insurer's credit rating is strong and historical returns are strong, bonuses could still be cut if markets hit a prolonged bad patch. This is why it makes sense to diversify your retirement bets through a basket of assets, including funds, SSB and CPF Life.

UNIT TRUSTS

Multi-asset funds have established themselves as a staple in asset managers' fund offerings. Investing in funds proffers a number of advantages, including transparency on the underlying assets and distributions, and the flexibility to redeem units should you face a cash emergency.

Of course, the caveat is that you need to have the discipline to invest regularly. Insurance products enforce this discipline by making it very costly for you to surrender early. If you invest in funds in the accumulation or savings phase, it is also ideal if you can re-invest the income distributed, which will then enhance your total return.

Unlike traditional insurance, there is of course no guarantee on a fund's return or distributions. Performance will reflect the underlying markets to which the portfolio is exposed. Hence, you will experience volatility, and short-term losses. On the whole, however, investing regularly over a long period in a diversified portfolio of funds should prove rewarding.

On distributions, a manager will typically pay out from the income or dividends earned, or from profits from the sale of assets. But the fund may also pay out from capital, particularly if sustaining an indicated yield is a priority. The composition of distributions will be disclosed to investors.

Total expense ratios will also have an impact on net returns.

Interestingly, there are a number of funds that pay a decent - even substantial - income. Based on a compilation of selected multi-asset fund categories by FSMOne.com - global, Asian and emerging market segments - while one-year returns are largely negative, longer periods are positive.

Using Bloomberg data, FSMOne.com finds that the dividend yield could be as high as 7 per cent (Manulife Global Asset Allocation - Growth (US dollar) and Parvest Diversified Dynamic Classic). Dividend yields are based on the sum of dividend per share amounts that have gone ex-dividend over the past 12 months.

Some firms give detailed information on their distributions, which helps if you are to do your own research. Schroder's Asian Income Fund, for example, yielded 4.9 per cent based on Bloomberg data. Based on historical statistics up to the end of 2017, the portfolio yield was 4.9 per cent, and its average payout yield since inception at 2011 was 5.6 per cent.

Depending on the payout period over the past year, some portion of the payout is from the capital and some from income.

A version of this article appeared in the print edition of The Sunday Times on March 24, 2019, with the headline 'Retirement income products: The flavour of the times'. Print Edition | Subscribe