[HKMC Annuity Guide] Is the government annuity worth buying? Which offers better returns than private annuities?

After retirement, the greatest fear is insufficient cash flow to cope with longevity risk; the older you get, the smaller your savings become. An annuity is a financial tool that converts a lump sum of savings into a stable monthly income. The “HKMC Annuity Plan”, underwritten by Hong Kong Annuity Company backed by the Hong Kong Government, has attracted considerable attention from retirees with its selling point of guaranteed lifetime payouts.

However, there are also various deferred annuities and immediate annuities available in the market. Compared with the government annuity, they each have their own merits in terms of return structure, flexibility and tax benefits. This article will explain, step by step, the details of the government annuity plan, the guaranteed period and surrender mechanism, differences in payouts between men and women, as well as the policy limit and other important information. We will then analyse its advantages and disadvantages one by one to help you decide whether it is worth considering. 

The Hong Kong Annuity Plan is underwritten by Hong Kong Annuity Limited, a wholly owned subsidiary of The Hong Kong Mortgage Corporation Limited, which is ultimately wholly owned by the Hong Kong SAR Government through the Exchange Fund. The plan is an “immediate life annuity”, meaning that after the policyholder pays a one-off premium, guaranteed annuity income can start as early as the following month and will then be paid for life until death. In terms of eligibility, only Hong Kong permanent residents aged 60 or above may apply. 

The table below sets out the key differences between the Hong Kong Annuity Plan and private annuities: 

Men and women receive different annuity payout rates

A key feature of the government annuity is that male and female policyholders receive different monthly annuity amounts. This is because women generally have a longer average life expectancy than men, so the annuity provider (Hong Kong Annuity Limited) needs to make payments over a longer period. As a result, under the same premium, women receive a lower monthly annuity amount than men. Taking a 60-year-old person who pays a single premium of HK$1 million as an example, a male policyholder would receive a guaranteed monthly annuity of HK$5,100, corresponding to an annuity payout rate of 6.1%; a female of the same age would receive HK$4,700 per month, with a payout rate of 5.6%.

As the application age increases, the monthly annuity amount and payout rate also rise accordingly. For a 65-year-old male applicant, the monthly annuity is HK$5,800 (payout rate of about 6.9%), while for a female it is HK$5,300 (about 6.3%). At age 75, a male applicant could receive HK$7,360 per month (about 8.8%), while a female would receive HK$6,420 (about 7.7%). The above figures are based on a single premium of HK$1 million and are calculated according to the current terms of the Hong Kong Annuity Plan. The actual amounts may vary slightly depending on age, premium and any changes to the terms. 

However, it is important to note that the annuity payout rate is not the same as the investment return rate. The payout rate is calculated as “guaranteed monthly annuity amount × 12 ÷ premium × 100%”, and it includes the gradual return of principal. To assess returns more objectively, one should refer to the internal rate of return (IRR). According to calculations by The Hong Kong Mortgage Corporation Limited, assuming a 65-year-old male applicant with an expected lifespan of around 86, the internal rate of return of the Hong Kong Annuity Plan is approximately 4%. The actual IRR will vary depending on individual longevity: the longer the policyholder lives, the more annuity payments they will receive, and the higher the actual IRR will be. 

Government annuity guarantee period and surrender arrangements

Many people worry: “If I buy an annuity and pass away soon afterwards, won’t I lose a lot?” In fact, the government annuity has a “guarantee period” mechanism to protect policyholders and their families. The guarantee period is calculated from the premium payment date until the cumulative guaranteed monthly annuity amount paid under the policy reaches 105% of the premiums paid. In other words, during the policy term, the plan will pay at least an amount equivalent to 105% of the premium in total to the insured person or their beneficiary. Taking a single premium of HK$1 million as an example, the guarantee period for a 60-year-old male applicant is about 206 months (around 17.2 years), while that for a 60-year-old female applicant is about 224 months (around 18.7 years). If the policyholder unfortunately passes away during the guarantee period, the designated beneficiary may choose either to continue receiving the remaining guaranteed monthly annuity payments, or to receive a lump-sum death benefit.

With effect from 29 April 2024, the plan has also updated the “special withdrawal arrangement”. Policyholders may make a one-off withdrawal of up to 100% of the remaining premiums paid (that is, the amount after deducting annuity payments already received) to cover medical- and dental-related expenses. The lifetime withdrawal limit is HK$1 million, and no withdrawal fee is payable.

Further reading: How soon can a tax-deductible annuity break even? How can you maximise your tax deduction? 

Government annuity premium cap

The premium for each Hong Kong Annuity policy ranges from HK$50,000 to HK$5,000,000, and the maximum total premium per insured person is HK$5 million. Taking a 60-year-old male applicant contributing the maximum HK$5 million as an example, the guaranteed monthly annuity income can reach about HK$25,500. 

The greatest attraction of the Government Annuity lies in its guaranteed lifetime cash flow — “a one-off purchase, lifelong payouts”. As long as the insured is still alive, HKMC Annuity Company will continue to pay a fixed amount of guaranteed annuity income every month. Regardless of market fluctuations, this income will not be reduced. For retirees, this arrangement of “creating their own pension” can effectively counter longevity risk. Even if life expectancy far exceeds expectations, there is no need to worry about depleting savings, as there will still be a stable monthly cash flow to cover day-to-day expenses. Moreover, the plan guarantees that the total benefits ultimately received by the policyholder (annuity payments received plus death benefit) will be no less than the premiums paid, effectively guaranteeing that they will at least break even.

Secondly, the Government background is another major advantage. HKMC Annuity Company is wholly owned by the Exchange Fund, and compared with private insurance companies, its credit risk is significantly lower. Policyholders need not worry about the insurer being unable to fulfil its annuity payment obligations due to poor management or insufficient capital. This sense of security, backed by Government credit, is something that most private annuity products find difficult to match.

Furthermore, the return structure of the Government Annuity is very simple and transparent. The monthly payout is fully guaranteed, with no so-called “non-guaranteed” portion. Policyholders know exactly how much they will receive each month, without needing to estimate or rely on the insurer’s investment performance. 

However, the government annuity is not without its shortcomings. First, in terms of product choice, the HKMC Annuity Plan only offers a single immediate lifetime annuity, with no options such as deferred annuities or fixed-term annuities, and is far less flexible than the private market. Private annuity products come in many forms, including deferred annuities with different premium payment periods, accumulation periods and payout periods, and some even offer an increasing annuity option to help combat inflation, making them suitable for different life stages and financial needs. 

Rate of return

In terms of rate of return, the government annuity pays a fixed guaranteed monthly annuity amount, with no non-guaranteed return component, whereas private annuities usually provide additional non-guaranteed income on top of the guaranteed annuity, potentially resulting in a higher overall expected return. In addition, the fixed amount under the government annuity will not be adjusted for inflation, so its purchasing power will be eroded over time. By contrast, the income from some private annuities is adjusted annually, which helps to cope with rising prices. 

The government annuity does not qualify for tax deductions

Lastly, the tax deduction benefit is worth mentioning. The government annuity is not a Qualifying Deferred Annuity Policy (QDAP) recognised by the Insurance Authority, so the premiums cannot be claimed as deductions for salaries tax or personal assessment. By contrast, each tax year private QDAPs can enjoy a maximum tax deduction of HK$60,000, which, calculated at the top tax rate of 17%, can save up to HK$10,200 in tax per year. For near-retirees who still need to pay tax, the tax deduction benefit of QDAPs effectively enhances their appeal, offering an additional advantage that the government annuity cannot provide. 

Further reading: Analysis of annuity tax-deductible products (10-year annuity term): see how annuities save tax and which provider offers the highest return!

Holding a HKMC Annuity Plan may affect the asset test calculation for the Old Age Living Allowance. The annuity payments distributed monthly (or at regular intervals) under the annuity plan will be counted by the Social Welfare Department as monthly income for the Old Age Living Allowance (including both the standard and higher rates); however, the premium amount you pay into the annuity is generally not counted as assets. In simple terms, the government annuity can help you “reduce assets”, but it will “increase monthly income”. 

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.