【Tax-deductible Annuities】What is an annuity? Learn about the types of annuities and common pitfalls

What is the annuity plan that people often mention? What is a Qualifying Deferred Annuity Policy (QDAP), hailed as one of the "three tax-saving items"? How exactly can tax-deductible annuities reduce taxes? Are they suitable for everyone, and what tax traps might be hidden within? Read the analysis below to learn more about how tax-deductible annuities save tax and their pros and cons.

An annuity is a long-term insurance product, not a bank deposit or a regular savings plan. Its main function is to help the policyholder convert funds into a stable cash income, ensuring adequate financial protection after retirement. Simply put, the policyholder pays a lump sum or makes installment payments to the insurance company, and then at a specified age or after a specified period, the insurer will pay out cash periodically, allowing the policyholder to use retirement savings in a disciplined way to cope with the financial pressures of longevity. Therefore, annuities are also called "self-made lifelong provisions".

An immediate annuity is a long-term insurance product in which the policyholder pays the premium in a single lump sum; once the policy takes effect, cash income can begin to be received from the following month. It provides a stable source of income for people preparing for or already in retirement, and is therefore particularly suitable for those about to enter retirement.

A deferred annuity is a type of long-term insurance product. The policyholder can choose to pay premiums in instalments or as a single lump sum, allowing the funds to grow gradually during the accumulation period and to begin receiving cash after a specified age or term. However, it is worth noting that not all deferred annuities qualify for tax deductions; only Qualifying Deferred Annuity Products (QDAPs) are eligible for tax benefits, and the earliest age to start receiving payments from a qualifying deferred annuity is 50, so it is more suitable for those who are still working.

As mentioned above, not all deferred annuities qualify for tax deductions; only Qualifying Deferred Annuity Products (QDAP) are eligible for tax concessions, and according to the Insurance Authority’s guidelines, a QDAP must meet the following conditions:

• The total premiums must be at least HK$180,000, and the contribution period must be at least 5 years
• The annuity payment period must be at least 10 years
• The annuitant must be aged 50 or above before they can receive annuity payments
• The product’s internal rate of return must be disclosed to allow policyholders to assess and compare
• The guaranteed and non-guaranteed amounts of the annuity must be clearly specified
• Premiums for additional covers (e.g., critical illness cover, hospital cash, etc.) must be clearly separated from the premiums of the Qualifying Deferred Annuity

One of the "three tax-saving options," the Qualifying Deferred Annuity (QDAP) (also known as the tax-deductible annuity), has attracted attention from the "sandwich-class" middle-income people since its introduction. However, some question whether the tax-deductible annuity is misleading, believe it's not worth buying, or even say it has many downsides. What traps are there? And how can you avoid falling for them?

Many people mistakenly treat the tax exemption for tax-deductible annuities as the actual amount saved, but this is incorrect. The tax exemption limit for tax-deductible annuities is $60,000 (per individual); for an employed couple the combined limit is up to $120,000. You should multiply the policy contributions (individual annual premium limit is $60,000) by your marginal tax rate (maximum 17%, minimum 2%) to find the actual tax reduction (i.e., tax saved), rather than directly deducting $60,000 from tax payable — do not misunderstand. Here is an example to illustrate:

Promotional materials or financial reports about tax-deductible annuity products in the market typically use the 17% top tax bracket as an example to calculate a larger tax saving. However, not everyone will reach that tax bracket; the actual tax savings depend on individual income and the allowances they can claim.

So how much monthly salary makes it worthwhile to buy an annuity to enjoy the tax deduction? According to the latest data from the Census and Statistics Department, the median monthly income last year for people in Hong Kong with a university education was $35,000. After deducting the basic allowance from their total income, more than $60,000 would fall into the 17% top tax bracket. If one insures an annuity for $60,000, there is a chance to receive a tax deduction of $10,200. However, everyone’s allowable deductions differ. Many of the "sandwich class" who support elderly parents and children can claim allowances for supporting children and parents, so the tax saved after buying an annuity varies by individual. You can make use of theSalaries Tax Calculator on the Inland Revenue Department’s website, or consult a tax adviser to calculate how much tax you could save by purchasing an annuity based on your income and allowances.

When workers choose tax-deductible annuities, they should understand and set goals — different tax-deductible annuities serve different purposes:

• Tax-deductible Annuity (Savings) QDAP
• Tax-deductible Annuity (Stable Income) QDAP
• Tax-deductible Annuity (Growth Income) QDAP
• Tax-deductible Annuity (Hedge Longevity Risk) QDAP

At the same time, you should understand the cash flow you want. In simple terms: the contribution amount, the contribution period, when you expect to start receiving the annuity, how long you will receive it, and the guaranteed and expected income, so you won’t discover later that the annuity you receive is not as expected. Also consider your ability to contribute — contribute within your means and do not over-contribute just to get tax deductions.

Tax-deductible annuities are medium- to long-term financial products and may not be suitable for those with insufficient liquid funds. If after purchasing an annuity they encounter cashflow problems and need funds for short-term debts, medical expenses, or other needs, surrendering a tax-deductible annuity plan early can lead to financial loss. In such cases, buying a tax-deductible annuity can be harmful.

When consumers choose a tax-deductible annuity product, they need to consider their personal financial situation, standard of living, and purchase objectives — for example, to achieve savings, plan for retirement, or hedge longevity risk — and think through the details. They should understand risks such as inflation and early surrender; as well as contribution period, guaranteed and non-guaranteed returns, death benefit protection, etc. If you have any questions, or want to learn more,You can WhatsApp 37051599 to consult a 10Life insurance advisor.

References：
1. IFEC. What is an annuity? 
2. IFEC. What is a Qualifying Deferred Annuity Policy?
 

Further reading：
[2025 Tax-Deductible Annuity Guide] Analysis of tax-deductible annuity products (10-year annuity term) — see how annuities save tax and which providers offer higher returns!
[Tax-Saving Tool] How soon can a tax-deductible annuity break even? How can you maximize your tax deductions?
How to choose a tax-deductible annuity 2025

Article last updated: 5 February 2025

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