In order to improve retirement protection, Government officials have recently raised the idea of integrating annuities with the MPF to enable retirees to access a regular source of post-retirement income. This has naturally led to some debate.
This article covers how annuities and the MPF system can work together, and builds upon the discussion on post-retirement investment in our last article.
The debate as alluded to above focused mainly on whether the conversion of retirees’ MPF balances into an annuity should be mandatory or voluntary. We believe it would be preferable to let people choose, thereby allowing flexibility within the system.
For most people, income reduces in retirement. With a relatively high cost of living in Hong Kong, many people feel anxious about making their money last, even those who have accumulated savings in the MPF or via other means. Given this backdrop, the availability of annuity products which can help to provide a stable long-term retirement income is clearly positive and should be positively encouraged.
HKMC Annuity Limited is one of the largest providers of annuities in Hong Kong. After payment of a single premium, the annuitant will receive a lifelong guaranteed monthly annuity income. The amount of annuity payment is set at the beginning of the policy and remains unchanged thereafter. The internal rate of return of the annuity plan is currently about 4%, which is higher than the bank deposit interest rate. However, the actual return depends on the how long the annuitant lives. We believe this annuity product is worthy of consideration to help generate a stable long-term income in retirement.
Another feature of this annuity is the special withdrawal for medical or dental expenses. Under this arrangement, the annuitant can make one withdrawal (only) during his or her lifetime, with a withdrawal limit of HK$300,000 specifically for medical or dental treatment. After the special withdrawal, the monthly annuity amount will be reduced. A further feature of the annuity is that during the guarantee period, the annuitant may surrender the annuity (without having to provide a reason) and may cash out the guaranteed cash amount. These features provide members with flexibility to help with unexpected expenses.
Some Hong Kong insurance companies also offer annuity products, with different terms and features. We are unable to list them all here as there are many to choose from. Potential purchasers should carefully study the product details and select the product or products which are suitable for their particular retirement needs.
MPF providers and the MPFA are also starting to make an effort in broadening the range of post-retirement investment funds. Currently, a small number of MPF providers offer such kind of investment fund.
Some Hong Kong people are eligible to receive a degree of financial protection from the Government, known as the Normal / Higher Old Age Living Allowance (OALA). The Chief Executive’s 2021 Policy Address noted that the Normal and Higher OALA will be merged in the 2nd half of 2022 and a higher amount of HK$3,815 per month will be paid. Applicants must pass an asset review test (the Policy Address also proposes to revise the upper limit in the 2nd half of 2022, with single persons and couples at HK$365,000 and HK$554,000 respectively). Note that accumulated MPF balances or other investments in cash, stocks and shares are included as "assets" under the review test, but the cash value of an annuity is exempted.
By contrast, the income generated from an annuity is included in the definition of income when determining eligibility to receive OALA, and the total monthly income limit is HK$10,330 and HK$15,620 for a single person and a couple respectively. As an example, if a 65-year-old male purchases an annuity for a single payment of HK$1 million, the annuity income is currently HK$5,800 per month. The equivalent annuity for a 65-year-old female is HK$ 5,300 per month.
Assuming the couple retires and each uses their HK$1 million MPF balances to purchase annuities, and their remaining assets are within the allowable OALA limits, they will be eligible for the OALA plus the annuity payments, totaling HK$18,730 per month (2 x HK$3,815 + HK%5,800 + HK$5,300).
By providing members more products and choices, we hope that Hong Kong people can better plan for retirement and enjoy a more comfortable life after retirement.
This article in English and Chinese is available for download.
| Title | File Type | File Size |
|---|---|---|
| The case for annuities to supplement MPF retirement savings | .3 MB |
