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Retirement Tips: Decoding the returns of Qualifying Deferred Annuity Policy (QDAP)
Qualifying Deferred Annuity Policy ("QDAP") policyholders can enjoy tax benefits, of up to HK$60,000 per year, making it a popular product for tax payers. A deferred annuity can be divided into three stages: contribution period, accumulation period, and income period. Policyholders generally make contributions during their working life. The funds are then accumulated over a period of time, turning into a steady retirement income. All QDAPs must satisfy the criteria from the Insurance Authority on premium, payment period, income period and disclosures.
10Life categorises QDAP products based on target segment
There is a large variety of QDAPs, with different contribution periods, accumulation periods and income periods. 10Life puts available products into three main categories based on target customer segment.
  1. QDAP (Savings), focusing on the return of savings in the medium term (annuity income starts earlier than the general retirement age)
  2. QDAP (Retirement), focusing on mid- to long-term retirement planning (annuity income starts at retirement age. 10 or 20 years of income period can be selected)
  3. QDAP (Longevity), focusing on hedging longevity risk (annuity income starts at retirement age, annuity income for as long as possible)

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10Life QDAP Rating Standards

The structure of annuity products is complex, making it difficult for consumers to compare. 10Life actuaries set QDAP rating standards based on target segment, of making it easier to understand the QDAP scores for medium-term savings, retirement planning or hedging longevity risks. The 10Life scoring methodology considers different factors including guaranteed returns, projected returns, early surrender coverage and early death coverage. 10Life’s scoring methodology is transparent and open. You may find the detailed assumptions and scoring factors on the 10Life website.

What are the Insurance Authority (IA)’s criteria on QDAP?
  • Minimum total premium of HK$180,000 and minimum premium payment period of 5 years
  • Minimum annuity period of 10 years
  • Annuity income to start at the age of 50 or above
  • Disclosure of minimum to maximum Internal Rate of Return (IRR) of the product
  • Clear presentation of the guaranteed and non-guaranteed annuity payment
  • Clear separation of premium of all riders (e.g. critical illness, hospitalisation cash, etc.) from the QDAP premium

You may find the full details from GL19: Guideline on Qualifying Deferred Annuity Policy issued by IA.
How much is the tax saving?
Premium paid for QDAP is tax deductible up to a limit of HK$60,000 per year. The actual tax amount saved would depend on your marginal tax rate. For example, based on the prevailing highest tax rate of 17%, you may save up to $10,200 tax payable per year from buying QDAP.
What should I consider when choosing QDAP?
When choosing QDAP, policyholders can compare products in the five steps proposed by the Insurance Authority*:
  • Understand the policy structure
  • Assess your personal needs
  • Compare internal rates of return
  • Look at the fulfillment ratio
  • Pay attention to the surrender value
10Life also published an article (in Chinese only) earlier to illustrate how to apply the QDAP comparison method above. You can click here to browse the article.
*For further details, please visit the Insurance Authority website.
Would the Inland Revenue Department (IRD) recover my tax deductions if I surrender my QDAP early?
Under current arrangements, early surrender of policy would not make the tax deductions recoverable by the IRD. However, if you cancel the policy during the cooling-off period and have your paid premium refunded, you would need to pay back any tax deductions made. For further details regarding tax deductions, please visit the IRD website.
What are guaranteed and projected internal rates of return? What is the difference between the two?

QDAP will accumulate the policyholder’s savings and convert into a stable income in the future. 10Life compares the returns of annuity products using Internal Rate of Return (IRR). Simply put, IRR can be understood as the annualised rate of return on investment.

According to the Insurance Authority, all QDAP product brochures must use a 45-year-old non-smoking male policyholder as an example to disclose the product IRRs. In addition, consumers can refer to the product brochure to understand the IRRs of the product under different payment periods, annuity start age and income periods.

IRRs can be guaranteed or projected. The guaranteed IRR is the return contractually guaranteed by the insurance company to the policyholder, while the projected IRR includes guaranteed and non-guaranteed returns. Non-guaranteed returns are affected by multiple factors such as the insurance company’s investment performance, profit sharing policy and the general economic environment, hence it is difficult to predict.

What is the shortest breakeven year of QDAP?
QDAP is a long-term insurance product. Consumers need to understand their ability to continue paying premium. As deferred annuities do not provide high liquidity especially in the early stage of the policy, policyholders should have other liquid funds to meet sudden needs. If the policyholder surrenders the policy early, the amount received may not cover the premium paid. The shortest guaranteed breakeven year of QDAP products currently in the market is 8 years.
What is fulfillment ratio?
The Insurance Authority requires insurance companies to disclose fulfillment ratios of products with non-guaranteed payouts. A fulfillment ratio of 100% means the insurance company has achieved its projected non-guaranteed payout. However, as QDAP products were first launched in 2019, it would take awhile till the first fulfillment ratios can be published.
Is the 10Life scoring methodology reliable?
10Life’s scoring methodology is open and transparent. It considers factors important to consumers. You can refer to the scoring methodology to understand the assumptions and considerations behind the scoring. The ratings and scores are for reference only, and do not constitute sales recommendations. Before purchasing products, you should understand your personal needs and analyse whether QDAP is suitable for you.
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