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【Tax-Deductible Annuity Comparison 2021】Flexible medium-term savings tool QDAP! Tax benefits drive guaranteed annual returns of over 5%.
In the run-up to the tax season, many people consider purchasing a Qualifying Deferred Annuity Policy (QDAP) to save tax. Commonly known as a “tax-deductible annuity”, QDAP offers policyholders tax benefits, similar to a tax refund, and is therefore also referred to by some as a “tax refund annuity” (see Note 1). Many people believe that tax-deductible annuities are limited to retirement planning, but they can in fact also be used for medium-term savings. If the tax saved is included when calculating the return, the return rate of QDAP will increase further. This effect is particularly apparent for high-income taxpayers. Returns can be divided into guaranteed and non-guaranteed expected returns, involving different degrees of risk. This article mainly compares the guaranteed returns and break-even years of QDAP, with a 45-year-old policyholder used for illustration.
What are the requirements for a tax-deductible annuity?
A deferred annuity is not necessarily a QDAP. According to Guideline 19 issued by the Insurance Authority, a QDAP must meet the following requirements:
- Total premiums of at least HK$180,000, with a premium payment period of at least 5 years
- An annuity payout period of at least 10 years
- The annuitant must be aged 50 or above before annuity payments can be received
- The product’s internal rate of return (IRR) must be disclosed
- The guaranteed and non-guaranteed amounts of the annuity must be clearly stated
- Premiums for supplementary benefits (such as critical illness cover and hospital cash benefits) must be calculated separately and clearly distinguished from the premiums for the qualifying deferred annuity
Tax deduction, not tax refund How much tax can be saved with a QDAP?
QDAP policyholders can enjoy tax benefits. The annual premium eligible for tax deduction is capped at HK$60,000. Based on the current highest tax rate of 17%, a maximum of HK$10,200 in tax can be saved each year. The process does not involve a tax refund.
Tax-deductible annuities can break even in as little as 8 years The average guaranteed return over 15 years for a 45-year-old policyholder can exceed 5% when tax deductions are included
For clients whose objective is medium-term savings, QDAPs with high returns and a short break-even period are certainly attractive. As the tax deduction also has an effect similar to a tax refund, the return on savings increases further. We have therefore calculated the guaranteed IRR of the products before and after tax deductions.
QDAP product brochures currently use a 45-year-old male policyholder as an example, setting out the product’s guaranteed IRR and expected IRR (before tax deductions). As the premium payment, accumulation and income periods vary among QDAPs, we selected US dollar plans with a 5-year premium payment period and income periods from age 50 to 59, age 50 to 64 or age 55 to 64, and used the IRR at age 60 as the basis for measuring the product’s effectiveness for medium-term savings.
Chart 1: Comparison of Qualifying Deferred Annuity Policies for savings purposes (45-year-old male policyholder)
Assuming the policyholder is a 45-year-old male, with a 5-year premium payment period, an income period from age 50 to 59, age 50 to 64 or age 55 to 64, and the currency is US dollars2
| Insurance company/ Qualifying Deferred Annuity Policy | Income period | Guaranteed break-even year | Guaranteed internal rate of return at age 60 GIRR (before tax deduction) | Highest guaranteed internal rate of return at age 60 IRR3,4 (based on the 17% tax band) | ||
| BOC Life BOC Life Deferred Annuity Plan (Fixed term) | Age 50 to 59 | 8 | 2.9% | 5.2% | ||
| Hang Seng Insurance “Easy Income” Deferred Annuity Plan (100% guaranteed) | Age 55 to 69 | 8 | 2.0% | 4.4% | ||
| China Taiping Taiping Fuyu Deferred Annuity Plan | Age 50 to 64 | 12 | 1.5% | 3.6% | ||
| FWD RetireFun Deferred Annuity Plan | Age 50 to 59 | 9 | 0.6% | 3.0% | ||
| Sun Life Foresight Deferred Annuity | Age 50 to 64 | 10 | 1.4% | 3.0% | ||
| YF Life YF Life Deferred Annuity | Age 55 to 64 | 12 | 1.1% | 2.7% | ||
| AXA IncomeEnrich Deferred Annuity Plan | Age 55 to 64 | 10 | 0.7% | 2.2% | ||
| AIA AIA Deferred Annuity Plan | Age 55 to 64 | 14 | 0.3% | 1.9% | ||
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For a 45-year-old policyholder seeking annuity income from age 50, BOC LifeBOC Life, China TaipingChina Taiping, FWDFWD and Hang Seng InsuranceHang Seng Insurance all offer this option among the products above.
In the past, some QDAP products had a guaranteed break-even period of only 5 years, allowing policyholders to regard them as a “tax avoidance wonder”. They could surrender the policy immediately after completing the premium payments without incurring a loss, and achieve a return rate of 5.9% by treating the tax deduction as part of the return (see Note 2). Of course, this went against the purpose of encouraging medium- to long-term savings through tax deductions. Therefore, the shortest guaranteed break-even period for current QDAPs is now 8 years, including the QDAPs from BOC LifeBOC Life and Hang Seng InsuranceHang Seng Insurance. If the policy is surrendered at the guaranteed break-even point of 8 years, the return rate based solely on the tax deduction is only 3.1% (see Note 3).
In fact, policyholders should not focus too heavily on the break-even period. Instead, retaining the QDAP for the policy term is more likely to achieve the intended retirement savings objectives. The product’s guaranteed return therefore deserves greater attention. The chart above shows that the guaranteed IRR of the BOC LifeBOC Life QDAP at age 60 is 2.9% (before tax deduction). If the return after tax deduction is included, the guaranteed IRR of the BOC LifeBOC Life QDAP increases to 5.2% (see Note 2), significantly higher than the return achieved by surrendering at the break-even point.
The above example focuses on the return at or before age 60. If the product’s income period has not ended, it is assumed that the client surrenders the policy at age 60, and all guaranteed income received is used to calculate the guaranteed internal rate of return at age 60.
It is worth noting that this article mainly analyses the guaranteed return of QDAPs. As participating policies, QDAPs also offer expected (that is, non-guaranteed) returns, for which detailed information is available in the 10Life “Product Decoder”. Non-guaranteed returns are affected by economic conditions, the insurer’s profitability and its bonus policies. In addition, 10Life actuaries have classified QDAPs into three categories, making it easier to understand the positioning of the various qualifying deferred annuity policies:
- QDAP (Savings): focuses on medium-term savings returns, with annuity income starting well before the usual retirement age.
- QDAP (Retirement): focuses on medium- to long-term retirement planning after retirement, with annuity income starting at the usual retirement age and income periods of 10 or 20 years available for selection.
- QDAP (Longevity): focuses on hedging longevity risk, with annuity income generally starting at the usual retirement age and being paid over a longer period, or even for life.
Finally, 10Life would like to remind everyone that, before purchasing a QDAP, you should first understand the purpose of the purchase and your affordability, as well as the potential risks of a QDAP, such as losses from early surrender, liquidity risk and changes in your personal financial or employment circumstances. Readers interested in learning more about how to compare QDAP products may refer to our earlier article, which uses real-life examples to compare tax-deductible annuity products by reference to the five steps proposed by the Insurance Authority. If you have any questions, you can consult a licensed adviser through the 10Life “Product Decoder”.
Notes:
- As the tax benefits do not involve a tax refund, strictly speaking, the term “tax-deductible annuity” is more accurate for QDAP.
- Assuming that the policyholder pays annual premiums of HK$60,000 for 5 years and is subject to the highest tax rate of 17%.
- When calculating the IRR at the guaranteed break-even point, in addition to considering the structure of the annuity product, we also assumed that:
a) The policyholder pays annual premiums of HK$60,000 for 5 years and is subject to the highest tax rate of 17%.
b) As there may be a one-year difference between purchasing an annuity and receiving the tax deduction, the tax relief begins one year after the premiums are paid. - The above information is provided by 10Life and updated as at 4 August 2021. It is for reference only and does not constitute sales advice.
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
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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
