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Breakdown! How do insurance companies lure you into the trap of qualifying deferred annuities?
To encourage saving for retirement, the Government introduced Qualifying Deferred Annuity Policies (QDAP). As long as a product meets the specified structural and disclosure requirements (see Note 1), policyholders can enjoy an annual tax deduction of up to $60,000. A deferred annuity generally involves the policyholder making contributions while in employment, and receiving annuity income after saving for a period of time. There are numerous qualifying deferred annuity products on the market. Consumers should not assume that being “qualifying” is sufficient. Meeting the tax deduction requirements is merely the basic threshold, and insurance companies still have considerable room to present their figures favourably within the disclosure framework. Without conducting in-depth research, consumers who buy a policy simply for the tax deduction may easily choose the wrong product.
According to the Insurance Authority’s Guideline (GL19), qualifying deferred annuities must meet specified disclosure requirements, such as stating the product’s internal rate of return and the guaranteed and non-guaranteed annuity amounts, so that policyholders can easily assess and compare them. However, insurance companies still have considerable room to dress up their products. The author attempts to unravel the pitfalls of QDAPs in the hope that everyone will become a savvy policyholder.
Pitfall 1: Being misled by the total internal rate of return
The Insurance Authority requires qualifying deferred annuities to disclose the annualised internal rate of return (IRR, Internal Rate of Return) in the product brochure, separately showing the guaranteed and non-guaranteed portions, with a 45-year-old non-smoking male used as an example. The total expected non-guaranteed internal rate of return (if any) will certainly be higher than the guaranteed internal rate of return. Insurance companies usually focus on promoting the product’s total return, but consumers should be aware that the total return includes a non-guaranteed portion. Insurance companies may well overstate the return figures to attract people to take out a policy. For deferred annuities intended for retirement planning, the guaranteed return is particularly important.
In product marketing materials, insurance companies publish the highest and lowest IRRs. Consumers should note that the range of this IRR is affected by various factors, including the contribution period, accumulation period, annuity payout period, policy currency and payment method. The Insurance Authority, however, has not standardised how these factors should be presented.
Regarding the ratio of guaranteed to non-guaranteed amounts for qualifying deferred annuities, although the Insurance Authority stipulates that the minimum guaranteed portion must meet specified requirements (see Note 2), for annuity products with longer policy terms, this requirement was reduced from the proposed 70% to a minimum guaranteed portion of 50% in response to feedback from the insurance industry (see Note 3). Under the regulations, this information only needs to be stated in the benefit illustration, and can generally be obtained only through an insurance adviser or broker.
Pitfall 2: Focusing only on tax deductions and overlooking the functions of annuity products
There are numerous qualifying deferred annuity products, with different contribution and annuity periods. Consumers may become very confused if they simply compare their internal rates of return. In addition, QDAP marketing in the market often focuses on tax benefits while overlooking product features. We generally regard annuities as retirement products that hedge against longevity risk. However, there is no shortage of products on the market that start paying annuities at age 50 and stop at age 60. These products clearly are not designed to support you throughout retirement; instead, they encourage saving and use tax deductions to enhance medium- to short-term returns. Therefore, qualifying deferred annuity policies can also be divided into two major categories: savings annuities and retirement annuities.
For this reason, 10Life’s rankings of qualifying deferred annuity products are also divided into two groups. Based on the Insurance Authority’s prescribed example of a 45-year-old non-smoking male, we have added the breakeven year, as well as annuity amounts and rates of return over different periods, placing annuity products on a common scale for convenient comparison. You can also browse the relevant ratings in 10Life’s Product Decoder according to your purpose for taking out a policy:
Qualifying Deferred Annuity – Tax-deductible savings: use tax deductions to make savings reach the breakeven point sooner and enhance medium- to short-term returns
Qualifying Deferred Annuity – Tax-deductible retirement: use tax deductions to generate long-term returns, create your own lifelong income and hedge against longevity risk
Annuity products are fairly complex, and returns vary depending on your expected contribution and payout periods, among other factors. If you have any questions, you can use Ask Questions Anonymously on the 10Life website and App to receive immediate replies from several licensed advisers.
Notes:
Qualifying deferred annuity products must comply with the Insurance Authority’s guidelines, as follows:
Total premiums must be at least $180,000, and the contribution period must be at least five years
The annuity payout period must be at least 10 years
The annuitant must be aged 50 or above before receiving the annuity
The product’s internal rate of return must be disclosed for customers’ assessment and comparison
The guaranteed and non-guaranteed annuity amounts must be clearly stated
Premiums for supplementary benefits (such as critical illness cover and hospital cash benefits) must be clearly separated from the premiums for the qualifying deferred annuity
According to the Insurance Authority’s guidelines, the guaranteed annuity portion of a qualifying deferred annuity must not be less than the minimum guaranteed portion shown in the table below:
Policy term (from the start of contributions and accumulation to the end of annuity payouts) | Minimum guaranteed portion |
Less than 30 years | 70% |
30 years to less than 40 years | 60% |
40 years or more | 50% |
For the insurance industry’s response regarding the ratio of guaranteed to non-guaranteed amounts for qualifying deferred annuities, see the following news reports:
Hong Kong Economic Journal, 11 March 2019: “【News】Proposed relaxation of conditions for annuity tax deductions: minimum guaranteed ratio to be divided into three tiers, adding investment flexibility”
Apple Daily, 15 May 2018: “【Annuity craze】Tax deduction of $36,000 has a low entry threshold; Chan Kin-por: $60,000 would be more reasonable”
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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