[Early Retirement Planning] Buying an immediate annuity at 50: how to choose wisely?

Early retirement, using good health to pursue personal interests or travel the world, is a dream for many office workers. However, shifting one’s focus away from work and truly taking control of one’s own time is not easy. The first thing to consider is whether savings and passive income can cover post-retirement expenses. As medical technology advances, life expectancy has increased significantly, and the retirement budget required may need to be higher. To hedge against longevity risk, many people use annuities to create their own retirement income. For those approaching retirement who have accumulated a certain amount of savings, it is possible to purchase an immediate annuity with a lump sum — “pay once, start receiving payouts immediately”. However, to meet the purpose of early retirement, only two immediate annuities on the market are available with an entry age as low as 50. This time, 10Life will help everyone analyse the annuity income and total return of immediate annuities, so that you can take a big step closer to your ideal retirement life.

An immediate annuity means that after the insured person has paid premiums over a short period, they can start receiving annuity income straight away, as early as one month after the first contribution. This differs from a deferred annuity, where the insured person usually only starts receiving annuity income after a longer accumulation period.

An immediate annuity’s income is generally divided into guaranteed and non-guaranteed portions. As the name suggests, the latter is not guaranteed and is affected by factors such as the insurer’s investment returns, claims and profits, so non-guaranteed annuity income is more variable. When comparing annuity income, it is advisable to pay attention to the guaranteed portion in order to accurately estimate monthly income after retirement.

Table 1 shows the guaranteed and non-guaranteed income of two immediate annuities, namely the BOC Life BOC Life Great Age Immediate Annuity Plan (Whole Life Annuity Period) and AXA Hong Kong and Macau Shielded Life Immediate Annuity Plan. It assumes the insured person takes out a one-off policy of HK$1 million at age 50 and starts receiving annuity income immediately, with the aim of obtaining the longest possible annuity income period. Both annuities are paid for life.

BOC Life and AXA Hong Kong and Macau’s product structures are slightly different. As shown in Table 1, BOC Life’s average annual guaranteed income is higher at ages 50-59 than in later years, whereas AXA Hong Kong and Macau remains unchanged throughout. From age 60 onwards, its average annual guaranteed income is higher than BOC Life’s. Therefore, AXA Hong Kong and Macau has a sooner guaranteed breakeven year, at age 80. In other words, once the insured person lives beyond 80, they can effectively secure the annuity income thereafter, and the longer they live, the more advantageous it becomes.

As BOC Life’s product involves both guaranteed and non-guaranteed annuity income, whether its actual total income can exceed AXA Hong Kong and Macau’s depends on the dividend realisation rate. BOC Life’s guaranteed breakeven year is as late as age 87. If non-guaranteed income is taken into account, the non-guaranteed breakeven period can be shortened to age 72.

In addition to insurers, the Government’s “HKMC Annuity Plan” is also a deferred annuity. Its guaranteed income amount is the highest among all annuities, with no non-guaranteed component. However, it is only available to seniors aged 60 or above, and may not be suitable for those who retire early.

When choosing an annuity, the insured person needs to assess whether the annuity payout period suits their personal needs and life expectancy. In the examples above, the income period of both products is lifelong, with payouts available for the rest of one’s life. Because the payout period is spread out over a longer time, the annual income distributable is lower. In fact, the BOC Life product also offers a fixed-term annuity option, with payouts over a specified number of years. As the payout period is shorter, the annual income received is naturally higher.

Both annuity plans above are based on a HK$1 million insured amount, with the insured person’s average monthly annuity income ranging from HK$2,800 (guaranteed by AXA Hong Kong and Macau) to HK$3,800 (non-guaranteed by BOC Life). This is clearly not enough, but annuities are among the few retirement tools that provide guaranteed income, and may be considered as part of a retirement financial planning portfolio. If you wish to enjoy an ideal retirement lifestyle, you will need to set aside a larger amount of principal.

An annuity can be used to hedge longevity risk, but if the insured unfortunately passes away early, will the principal be lost? Generally speaking, regardless of when the insured dies, the annuity income paid out (received by the insured) and the death benefit (received by the beneficiary) will not be less than the total premiums paid, so an annuity can preserve the principal. If the insured unfortunately dies early, the designated beneficiary may choose to receive a lump-sum payment or a monthly death benefit.

Table 2 shows the guaranteed total return. As the cumulative annuity income paid out increases, the guaranteed death benefit will gradually decrease and may even fall to zero. After taking into account the guaranteed income and guaranteed death benefit, regardless of the year in which the insured person dies, the guaranteed total return of the AXA Hong Kong and Macau plan is higher than that of BOC Life.

Table 3 shows the non-guaranteed total return of immediate annuities. Among the annuity products above, if the life insured dies at the age of 65, BOC Life’s product offers a higher non-guaranteed total return. If death occurs at other ages, AXA Hong Kong and Macau offers the higher combined total of guaranteed annuity payments and non-guaranteed death benefits.

It is worth noting that insurers actively add different features to immediate annuity products. For example, AXA Hong Kong and Macau offers dementia coverage: if the life insured is first diagnosed with severe dementia before a specified age, an additional monthly income will be paid. BOC Life’s product, on the other hand, offers a life-stage reward: if the life insured experiences a specified event (the birth of a child or grandchild), a designated reward will be paid, and so on.

Finally, the immediate annuities discussed in this article are targeted at early retirees. If your ideal retirement age is after 60, there will be more immediate annuity options available in the market. If you would like to know more tips on choosing an immediate annuity, please WhatsApp 37051599 to enquire with a 10Life insurance consultant.

Note:
1. This article was last updated on 12 September 2023.

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.