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【Tax-Deductible Annuity Guide】5 steps to plan your retirement. Compare AIA, Manulife and Prudential products—which offers greater flexibility?
As tax season approaches, advertisements for qualifying deferred annuity policies (QDAP), commonly known as “tax-deductible annuities”, are everywhere. Faced with different products, how should the public select a product according to their personal needs?
Based on the information on the Insurance Authority’s website, we have summarised the “five steps” for choosing a tax-deductible annuity, and compared the tax-deductible annuity plans offered by three major insurance companies, including AIA’s Deferred Annuity Plan, ManulifeManulifeManuLeisure and Prudential UK’s PRURetirement Deferred Annuity Plan, to determine which offers greater flexibility.
Step 1: Understand the policy structure
Deferred annuity products consist of a premium payment period, an accumulation period and an annuity payout period (the “annuity period”). According to the Insurance Authority’s guidelines, the premium payment period for a tax-deductible annuity must be at least five years, the annuity period must be at least 10 years, and annuity payments may only begin when the policyholder is aged 50 or above.
Within these guidelines, tax-deductible annuity products in the market have different structures to cater for the financial planning needs of different consumers. Comparing the premium payment periods of the tax-deductible annuity products offered by the three major insurance companies, AIA offers only a five-year period, while Manulife and Prudential offer both five-year and 10-year periods.
As for the annuity payout period, AIA offers only a 10-year option; Prudential offers 10-year and 20-year options; while Manulife offers more options, including 15-, 20-, 25- and 30-year periods. Consumers should also pay attention to the annuity commencement age and annuity period in order to determine the age at which annuity income will begin.
Chart 1: Comparison of the product structures of AIA, Manulife and Prudential tax-deductible annuities
AIA Deferred Annuity
Premium payment period | Annuity period | Entry age | Annuity commencement age |
5 years | 10 years | 18 to 40 | 50 |
18 to 45 | 55 | ||
18 to 50 | 60 | ||
18 to 55 | 65 | ||
18 to 60 | 70 |
ManulifeManuLeisure
Premium payment period | Annuity period | Entry age | Annuity commencement age |
5 years | 30 years | 18 to 50 | 55 |
25 years | 18 to 55 | 60 | |
20 years | 18 to 60 | 65 | |
15 years | 18 to 65 | 70 | |
10 years | 25 years | 18 to 50 | 60 |
20 years | 18 to 55 | 65 | |
15 years | 18 to 60 | 70 |
Prudential “PRUretirement Deferred Annuity”
Premium payment period | Annuity period | Entry age | Annuity commencement age |
5 years | 10 years | 45 to 69 | 50 to 74 (depending on entry age and premium payment period) |
40 to 64 | |||
30 to 54 | |||
10 years | 20 years | 30 to 54 | |
10 years | 20 to 44 |
Note: The above information is extracted from the relevant tax-deductible annuity product brochures and was updated on 10 February 2022.
Step 2: Assess your needs
What is the purpose of taking out a tax-deductible annuity? Is it to save, create a steady source of retirement income, or hedge against longevity risk? You should first understand your own needs before selecting a suitable product.
Suppose policyholder Mr A is a 45-year-old non-smoking man who plans to take out a tax-deductible annuity while working, so that he can enjoy the maximum annual tax deduction of HK$60,000 while planning for retirement at an early stage. As he still has some time before retirement, Mr A is inclined to choose a product with a premium payment period of at least 10 years in order to accumulate a larger amount of funds for growth.
Next, Mr A needs to consider his retirement age and annuity period. The typical retirement age is 65, so Mr A plans to begin receiving annuity payments at 65. As for the annuity period, given that the average life expectancy of men in Hong Kong is around 80, Mr A intends to select a tax-deductible annuity with an annuity payout period from age 65 to 85.
Among the three major insurance companies, only Manulife and Prudential meet Mr A’s requirements in the above example, offering a 10-year premium payment period and a 20-year annuity period from age 65 to 85. Therefore, only these two products will be compared below.
Chart 2: The three key requirements for a 45-year-old policyholder seeking a tax-deductible annuity
Three key requirements | AIA | Manulife | Prudential |
1) Premium payment period of at least 10 years | ✗ | ✓ | ✓ |
2) Begin receiving annuity payments at 65 | ✓ | ✓ | ✓ |
3) Receive annuity payments until age 85 (20 years in total) | ✗ | ✓ | ✓ |
Step 3: Compare the internal rate of return
The internal rate of return (Internal rate of return, or IRR) can be understood as the annualised rate of return. For ease of comparison, in accordance with the Insurance Authority’s requirements, tax-deductible annuity product brochures all use the same example—a 45-year-old non-smoking male policyholder—to present the IRR.
IRR can be divided into guaranteed and projected IRR. The guaranteed IRR is the minimum rate of return that the insurance company promises to provide under the policy contract, while the projected IRR includes returns calculated using the non-guaranteed portion. When comparing IRRs through product brochures, first select the premium payment period and annuity period, and then check the relevant guaranteed and projected IRRs.
Continuing with the above example, Mr A wishes to purchase a product with a 10-year premium payment period and receive annuity payments for 20 years from age 65 to 85. We refer to the relevant data in the product brochures of Manulife and Prudential. The conclusion is that the two products have similar structures, but their guaranteed and projected IRRs differ. Manulife’s tax-deductible annuity has a guaranteed IRR of 1.69% and a projected IRR of 4.23%, both higher than Prudential’s.
Chart 3: Comparison of the IRRs of Manulife and Prudential tax-deductible annuities under the same assumptions
Manulife | Prudential | |
Guaranteed IRR | 1.69% | 1.33% |
Projected IRR | 4.23% | 3.61% |
Note: The calculation assumes a 45-year-old non-smoking male policyholder, a 10-year premium payment period and an annuity payout period from age 65 to 85, with premiums paid annually. The above information is extracted from the relevant tax-deductible annuity product brochures and was updated on 10 February 2022.
Step 4: Refer to the Fulfilment Ratio
Projected returns involve non-guaranteed components and are affected by factors including the insurance company’s investment performance, dividend policy and the economic environment. The actual amount may not be fully realised.
According to the Insurance Authority’s requirements, insurance companies must publish the Fulfilment Ratio on their websites to enable policyholders to understand more easily how the companies have fulfilled their non-guaranteed returns. A Fulfilment Ratio of 100% means that the insurance company has fully delivered on its original commitment regarding the non-guaranteed returns.
However, as tax-deductible annuity products were launched in 2019, relevant Fulfilment Ratio data is limited. We can refer to two popular participating savings insurance products offered by Manulife and Prudential—ManulifeLa Vie (hereinafter referred to as “Cabernet”), and Prudential’s Evergreen Growth Saver (hereinafter referred to as “Evergreen Growth Saver”)—to assess their historical dividend performance.
As shown in the chart, using US dollar policies as an example, the Fulfilment Ratio of Manulife’s Cabernet is relatively stable, ranging from 85% to 100%, while Prudential’s Evergreen Growth Saver has a more fluctuating Fulfilment Ratio, ranging from 43% to 129%.
Chart 4: Comparison of the Fulfilment Ratios of popular Manulife and Prudential products (US dollars)
ManulifeLa Vie
Prudential UK Evergreen Growth Saver
Note: The above information is extracted from the relevant insurance companies’ websites and was updated on 10 February 2022.
Step 5: Pay attention to the Surrender Value
As tax-deductible annuities are long-term insurance products, the period from the start of premium payments to the receipt of annuity payments often spans several decades. Policyholders need to consider whether they have sufficient capacity to continue paying premiums, in order to avoid surrendering the policy early, as the amount recoverable may be substantially lower than the premiums paid.
Policyholders can also check in the product brochure the percentage of the first-year surrender value relative to the premiums paid. The data below is extracted from the product brochures. For Manulife’s tax-deductible annuity, the first-year surrender value represents 32.7% to 33% of the annual premiums paid, while the figure for Prudential is 14%.
Chart 5: Comparison of the first-year surrender value as a percentage of premiums paid for Manulife and Prudential tax-deductible annuities
| First-year surrender value as a percentage of premiums paid | Manulife ManuLeisure | Prudential “PRUretirement Deferred Annuity” |
| Highest | 33.0% | 14% |
| Lowest | 32.7% |
Note: The calculation assumes a 45-year-old non-smoking male policyholder, a 10-year premium payment period and an annuity payout period from age 65 to 85, with premiums paid annually. The above information is extracted from the relevant tax-deductible annuity policy brochures and was updated on 10 February 2022.
After going through the above five steps, policyholders should have a basic understanding of tax-deductible annuities. If you would like to learn more, you can consult a licensed adviser through the 10Life website or browse the Product Decoder to compare tax-deductible annuities with different structures and purposes.
Note:
- This article was prepared by 10Life using market information collected from various sources and is provided for general reference only. It does not take into account any individual needs or suitability considerations and should not be regarded as sales advice. Before taking out a policy, you should discuss an insurance solution suitable for you with a licensed insurance adviser and rely on the information provided by the insurance company.
- The above premium information was updated on 10 February 2022 and does not include the premium levy collected by the Insurance Authority.
- Last updated: 10 February 2022.
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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