How to choose self-made retirement income? Comparing stocks, equity funds, dividend funds and Hong Kong annuities

Having worked hard for most of their lives, many people hope to enjoy retirement, but relying solely on a pension or MPF may not be enough to cover daily expenses after retirement. "How to create your own steady income after retirement?" is a major question for retirees. The Hong Kong stock market has been weak in recent years; retirees who used to buy dividend‑paying blue‑chip stocks to generate income may find that plan no longer works. At times like this, retirees may need to look for other financial tools. 10Life will compare stocks (HSBC), equity funds, dividend funds, and the government‑backed Hong Kong annuity. By understanding the pros and cons of different tools, retirees can create their own steady income and enjoy retirement with peace of mind.

10Life assumes retirees allocate HK$1,000,000 of savings into common retirement planning tools, such as a blue‑chip stock (HSBC), the Tracker Fund that tracks the Hang Seng Index, the Allianz Income and Growth Fund, and a Hong Kong annuity, and, referencing the past six years' performance (November 2018 to November 2024), compares their annual dividend distributions. 

In terms of dividend income from stocks, over the past six years HSBC's annual dividend payments ranged from HKD 25,994 to HKD 97,335, but the stock suspended dividends in 2020 — a reminder to investors that HSBC does not necessarily pay dividends to shareholders every year. As for equity funds, the Tracker Fund's annual distributions ranged from HKD 24,568 to HKD 35,701; with the Hang Seng Index weak in the past two years, the distributions have also been relatively poor.

The Allianz Income and Growth Fund had the highest average annual distribution; as of November 2019 it paid HKD 87,630 in a year, and in 2024 it paid HKD 65,061. However, note that over the past five years its annual distributions have fallen year by year, so future payout trends are worth watching. (Note: The income figures for the Allianz Income and Growth Fund mentioned in this article assume investors purchase the fund on the fund market, not through investment-linked insurance.)

As for the government-backed Hong Kong Annuity, it pays annuity income monthly; assuming a 65-year-old man purchases it, the annual annuity income totals HKD 69,600. Because the payouts of the Hong Kong Annuity are fully guaranteed, the annuity will continue to pay even if market conditions worsen. However, readers should note that annuity income will vary depending on the purchaser's age at entry, gender, and purchase amount — for details please visit the Hong Kong Annuity website.

The annual income from stocks, equity funds, and dividend funds is based on net asset value (NAV) and the dividend rate; both are affected by market fluctuations and the issuing company’s policies, so their dividend payouts fluctuate. Many retirees hope that stocks and funds can provide both capital gains and income, but that indeed tests everyone’s long-term investment judgment.

As for funds, each fund’s dividend strategy is different. Some reinvest profits or distribute dividends; others may pay dividends out of capital, but this can cause the NAV per share to drop immediately and reduce the fund capital available for future investment. One of the standout dividend funds, the Allianz Income and Growth Fund, belongs to the latter category — simply put, it can “pay out principal.”

Speaking of returning principal, many people think a Hong Kong annuity also returns principal — how is it different from a dividend fund? Undoubtedly, as the annuitant receives annuity payments, the policy’s cash value will decline. So, besides consuming their principal, what else does the annuitant get? This relates to the purpose of a Hong Kong annuity: hedging longevity risk. For example, if a 65-year-old man purchases a HK$1,000,000 Hong Kong annuity, under the contract the principal will have been fully paid out in a little over 14 years. However, the Hong Kong annuity is guaranteed for life — even if the annuitant lives to 120, he will still receive a stable annual annuity of HK$69,600. As for stocks, equity funds, and dividend funds, we cannot calculate their long-term share prices or NAVs, so holders’ future income is uncertain.

When considering retirement planning, you should also assess the liquidity of each financial instrument. For Hong Kong annuities, if the insured surrenders the policy early before the break-even year or withdraws part of the cash, unless the latter involves medical and dental expenses, the insured may incur a loss (the withdrawn/returned amount is less than the contributions minus the annuity payments already received). As for stocks, equity funds, and dividend funds, liquidity is relatively high, but whether the selling price is high or low depends on the market conditions and the relevant net asset value at that time.

Overall, the financial tools mentioned above each have their roles. Hong Kong annuities are strong in guaranteeing a stable lifelong income, but they have low liquidity and cannot appreciate in value. In contrast, dividends and net asset values of stocks, equity funds, and dividend funds are more volatile and can rise or fall, but they cannot hedge longevity risk. As part of retirement financial planning, how should one choose?

Retirees should first consider the level of risk they can tolerate, understand the roles of different financial tools, and construct a balanced investment portfolio rather than betting everything on one option. Hong Kong annuities offer stable payouts that are not affected by market conditions, carry lower risk, and are worth considering for retirees. However, when the market is strong and there is inflationary pressure, people may be dissatisfied with the fixed income of Hong Kong annuities. Therefore, in a retirement portfolio, one may, within their means, include other investment instruments, but be mindful of the potential risks.

Compare immediate annuities: primarily for retirees or those about to retire
Compare qualifying deferred annuities (tax-deductible savings): primarily for working individuals
Compare qualifying deferred annuities (tax-deductible retirement): primarily for working individuals 

Note: This article was last updated on November 15, 2024.

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.