Hongkongers should consider investing in annuities, which will not only reduce their tax bill but also secure their financial future, and retirees should invest at least a quarter of their savings in them, financial advisers say.
An annuity is an insurance product that pays out income and can be used as part of a retirement strategy. Annuity holders can make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future, for periods ranging from 10 years to the rest of their lives.
Annuities fall into two main categories in terms of the premium to be paid - immediate and deferred annuity. They can also be either fixed or variable, depending on whether the payout is a fixed sum, tied to the market's performance, or a combination of the two.
An immediate annuity allows one to convert a lump sum of money into an annuity, so that they can immediately receive a regular income.
These plans are more suitable for retirees who have accumulated a large nest egg but have no income. They can consider using part of their savings to purchase an immediate annuity to start receiving a steady income which will help pay for their daily expenses, according to the Investor and Financial Education Council under the Securities and Futures Commission.
Hong Kong's government offers the HKMC Annuity plan, the first public immediate annuity for senior citizens.
Launched in July 2018, the life annuity is open to permanent residents aged over 60 and offers a guaranteed income for life.
An annuity's performance can be calculated by the internal rate of return, and the rate depends on the entry age and how many monthly payments a policy holder will receive.
Based on the calculation of the Hong Kong Mortgage Corporation, the IRR of HKMC's Annuity Plan is about 4 percent.
China Tonghai Private Wealth Management managing director Denise Cheung Pui-yee says retirees should invest a third of their savings in an annuity and keep the rest for a rainy day.
But if they have other sources of income - from stocks bonds or rentals - they only need to put a fourth of their savings in an annuity, she says.
A deferred plan accumulates capital paid by the annuity holder to build up an income stream for retirement. The insurer invests the capital during the accumulation period and starts to pay after a certain period of time, or at a specified age of the annuitant.
Deferred plans are suitable for people who are employed. Most deferred plans involve regular payments over five or 10 years or even longer, allowing policyholders to accumulate capital through regular savings.
At the time of retirement, the capital is converted into a steady income stream.
To encourage Hongkongers to plan for retirement early in life, the government lets annuity holders enjoy tax deductions of as much as HK$60,000 a year on qualifying deferred annuity policies.
A QDAP requires a minimum total premium of HK$180,000 and a minimum payment period of five years, according to the Insurance Authority. The annuity period is at least 10 years and policyholders aged 50 or above can receive the annuity.
Among other plans, the Foresight Deferred Annuity Plan from Sun Life Financial carries a guaranteed IRR of 1.57 percent to 2.52 percent for an 85-year-old holder after a premium payment term of ten years and a 20-year accumulation phase.
The IRR is based on an assumption of an annuity period of 20 years, meaning that the annuitant could enjoy a stable cash inflow for another 10 years, data of the insurer shows.
If the non-guaranteed tranche is added, the total IRR ranges from 3.14 percent to 3.97 percent.
Others like AIA Hong Kong, FTLife Insurance, Prudential Hong Kong, Manulife Hong Kong, and AXA, among others, all provide similar policies with different terms.
Last year, Labor and Welfare Secretary Law Chi-kwong said the government was looking making it mandatory to convert MPF funds into an annuity, but in the face of criticism, said citizens will not be requested to convert the MPF into an annuity and forcing people to make the conversion is an "Arabian Nights" case that would never happen in the city.
GOVERNMENT-BACKED: Financial Secretary Paul Chan at the launch of the HKMA Annuity plan.
