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Golden Decade with stable income, ensuring a prosperous retirement? 10Life compares Qualifying Deferred Annuity Plans (QDAP).
As tax season approaches, the Qualifying Deferred Annuity Policy (QDAP), commonly referred to as a "tax-deductible annuity," is once again gaining popularity! QDAP offers tax benefits, with policyholders eligible for an annual tax exemption of up to HKD 60,000. Many major insurance companies have launched QDAP products, but their positioning, purposes, and returns vary significantly. Amidst the tax deduction frenzy, it is crucial to understand QDAP products before purchasing. 10Life has consistently conducted in-depth analyses of various QDAP plans in the market, recognising the importance of retirement planning. We have also received feedback from users, revealing diverse perspectives on "retirement." Beyond mitigating longevity risk and creating a steady income stream, some prioritise cash flow in the early stages of retirement. To better align with the different uses of QDAP, 10Life actuaries have reclassified QDAP into three distinct purposes, making it easier for everyone to understand the positioning of each Qualifying Deferred Annuity Policy! Below is the updated Product Decoder:
- QDAP (Savings): Focuses on mid-term savings returns (annuity income starts well before the typical retirement age)
- QDAP (Retirement): Emphasises mid-to-long-term retirement planning after retirement (annuity income begins at the typical retirement age, with options for a 10-year or 20-year income period)
- QDAP (Longevity): Prioritises hedging longevity risk (annuity income starts at the typical retirement age, with a longer payout period, or even lifelong in some cases)
Guaranteed Returns Are Crucial for Retirement Planning – Tax Deductions Enhance Returns
A deferred annuity can be divided into three phases: the contribution period, the accumulation period, and the income period. Before purchasing, it is important to understand how long you wish to contribute and when you want the annuity to start, as the contribution and income period options offered by various QDAPs in the market differ and may not necessarily meet your needs. This time, the author will analyse QDAPs designed for mid-term retirement purposes. Assume the policyholder starts contributing at age 45, with an annual contribution of USD 7,800 (approximately HKD 60,000, the maximum annual tax exemption), expecting to retire at 65 and hoping to receive annuity income during the early stage of retirement (ages 65 to 75). This allows them to enjoy life, travel more, and broaden their horizons during the golden decade after retirement.
Chart 1: Comparison of Guaranteed Returns for Qualifying Deferred Annuity Policies (Income Period from 65 to 75 Years Old)
Assumption: Policyholder is a 45-year-old male, contributing USD 7,800 annually; income period from 65 to 75 years old
| Deferred Annuity Product | Contribution Period | Total Contributions (USD) | Total Guaranteed Income | Guaranteed Internal Rate of Return (IRR) at Maturity | ||
| Before Tax Deduction | After Tax Deduction (at 17% tax rate) | |||||
| AIA 友邦 AIA延期年金計劃 | 5 years | 39,000 | 56,366 | 1.6% | 2.4% | |
| AXA 安盛 「賞豐盛」延期年金計劃 | 10 years | 78,000 | 100,152 | 1.2% | 2.1% | |
| Generali 忠意香港 「豐盛稅悅保」延期年⾦ | 10 years | 78,000 | 130,928 | 2.5% | 3.4% | |
| Sun Life 永明金融 豐碩延期年金計劃 | 10 years | 78,000 | 124,747 | 2.3% | 3.2% | |
| YF Life 萬通 萬通延期年金 | 10 years | 78,000 | 117,861 | 2.0% | 2.9% | |
| Notes: 1. The product information is updated as of 8 February 2021. 2. Assumption: Policyholder is a 45-year-old male, contributing USD 7,800 annually; income period from 65 to 75 years old; the premium is eligible for tax relief, with an annual exemption limit of HKD 60,000 (equivalent to USD 7,800). 3. The contribution period for AIA Deferred Annuity Plan is 5 years, while other QDAPs have a contribution period of 10 years. 4. Given the potential one-year discrepancy between purchasing an annuity and tax deduction, when calculating the above internal rate of return, we assume that tax relief begins one year after the premium is paid. 5. The marginal tax rates of the Hong Kong Inland Revenue Department are 2%, 6%, 10%, 14%, and 17%. This chart uses the highest tax rate of 17% for calculation. However, the actual tax savings amount depends on individual circumstances and may differ from the amount stated in the example. 6. 10Life collects publicly available data from insurance companies through various channels and calculates the above information using data and mathematical computations. The figures are for reference only and do not take into account your personal needs. They are by no means sales advice. Before purchasing, users should discuss suitable insurance plans with a licensed insurance advisor. | ||||||
Currently, there are several QDAPs in the market that offer an income period from 65 to 75 years old (see Chart 1). These are offered by AIA, AXA Hong Kong and Macau, Generali, Sun Life, and YF Life. Regarding the contribution period, AIA offers a QDAP with a 5-year contribution period, while the other four allow clients to contribute for 10 years. Since the annual contribution amount is the same, and AIA’s QDAP has a shorter contribution period, its total contributions are half of the others.
When evaluating the returns of QDAPs, we calculate the product’s Internal Rate of Return (IRR, which can be understood as the annualised return rate) and distinguish between guaranteed and projected returns. First, let’s discuss guaranteed returns, which are contractually assured by the insurance company and are crucial for retirement planning.
As shown in Chart 1, Generali’s "TaxJOY Bounty" Deferred Annuity has the highest guaranteed IRR at maturity, reaching 2.5% annually, with a total guaranteed income exceeding USD 130,000, which is 168% of the total contributions. When factoring in tax deductions, assuming the policyholder pays a 17% tax rate, the guaranteed IRR of QDAPs can be further enhanced, with Generali’s QDAP rising to 3.4%. In the current low-interest environment, this guaranteed return is quite impressive. Additionally, saving on taxes can be seen as saving money, offering a dual benefit.
Besides guaranteed returns, insurance companies often highlight seemingly more attractive projected returns, which include non-guaranteed components. The actual payout depends on multiple factors, such as the insurance company’s investment performance, dividend policy, and economic conditions. 10Life’s Product Decoder also lists the projected returns of QDAPs. However, if you are focused on a retirement "safety net," you should pay attention to guaranteed returns.
Flexibility in Adjusting Income Period
Although most deferred annuities offer different income period options, clients typically need to select one at the time of purchase, and the income period cannot be changed during the policy term. Currently, some insurance companies are attempting to provide policyholders with more flexibility in the income period. For instance, Generali’s QDAP allows policyholders to change the starting age of the annuity income period (ranging from 50 to 80 years old, provided all premiums have been paid) after the policy takes effect. If a policyholder wishes to retire earlier, they can start receiving annuity payments sooner. However, as the accumulation period changes, the policy value and return rate will also be adjusted accordingly.
Lastly, a reminder that deferred annuities are mid-to-long-term insurance products. You should ensure you have sufficient contribution capacity to avoid losses due to early surrender. Additionally, this article only compares one specific income period. When selecting a product, you should consider your personal needs and understand the insurance product. If you wish to compare more QDAP products, you can visit 10Life’s Product Decoder.
Note:
- The above information is provided by 10Life and is for reference only. It is not a sales proposal. The information is updated as of 8 February 2021.
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.
10Life Editorial Team
Our team of professional content researchers focussing on insurance
10Life Editorial Team
Our team of professional content researchers focussing on insurance
Disclaimer
10Life Product Comparison and 10Life Insurance Ratings are developed by 10Life Financial Limited, an authorised insurance broker company licensed with the Insurance Authority under License Number FB1526. 10Life Product Comparison and 10Life Insurance Ratings are developed for generic customer segments using mathematical calculations based on product information, facts and data, and are not influenced by any partnerships with or fees received from insurance companies. Any information on 10Life Platform ("10Life Information"), including but not limited to Product Comparison, Product Ratings, Blog Articles are intended for general education purpose and reference only. None of the 10Life Information is intended, nor should they be considered or relied upon, as regulated advice, insurance, financial, investment or professional advice, recommendation, approval, endorsement, invitation or solicitation in respect of any insurance, financial or investment products. 10Life Information does not take into account your individual needs. Reading 10Life Information should not be considered as conducting a suitability assessment, and is not sufficient to form the basis of any decisions to purchase any insurance products. You should rely on information authorised by insurance companies, carry out your own research and/or seek independent advice from licensed intermediaries before purchasing any insurance products or making any insurance decisions. While reasonable effort is used when collecting, validating and updating 10Life Information from various channels, none of 10Life Group and its subsidiaries, affiliates, agents, directors, officers and employees will be responsible for any liability, claim or loss arising from or associated with you using 10Life Information. No warranty, representation or guarantee is given by 10Life Group and its subsidiaries on the accuracy, completeness and timeliness of the information. If you have any questions on 10Life Product Comparison and 10Life Insurance Ratings, please email us at enquiries@10life.com
