September 3, 2007

Compulsory Annuity Scheme is a bad idea

The compulsory annuity program that the government is thinking of is not a good idea in my opinion. This is simply because I believe by setting aside the money in a saving account for the members will be more feasible and better, as this will allow them to have their money return to them should they fail to live beyond age 85.

I did a quick calculation based on my understanding of the scheme:

1) Assuming that a sum is set aside at age 55, and can only start to withdraw at age 85.
2) Assuming that one live till 100 years old (which is highly unlikely, but for argument sake)
3) Assuming the scheme is to let one withdraw $300 per month.
4) Also assuming an interest rate of 4% (which is the current Special account interest rate)

With the above assumptions, we can calculate the Present value (PV) of the sum required to have for one in age 85. The PV is $40,558.

To achieve an amount of $40,558 from the time a member withdraw his money in age 55 to the age 85 is a thirty-year period. Therefore, by setting aside $12,505 at the age of 55 and compounded it at 4% over 30 years, one can easily meet the objective of having $300 per month.

The good thing about this saving scheme is that the member need not worry about whether he can live beyond 85 as it is just a saving scheme and upon his death, any outstanding sum can be returned to his family member.

I urge the government to consider this alternative instead.

2 comments:

Emergency Fax Payday Loans said...

This scheme is most terrible for old guys, as you said someone applying at age of 55 would get money at 85 by which time he'd die

JasK said...

The article on 22th Aug by ST wasn't very specific. If i am not wrong, this 'tail-end annuity' would be similar to those issued from issurance companies instead of CPF board. Currently if one leaves his MMS with CPF board for monthly payment, members will receive monthly income from 62 to 82 and longer if they choose to receive after 62 but the payment stops at 82. The article spoke about a separate sum of $ from MMS for this annuity and also give examples of one that works like a life annuity from an insurance company. So if it is tailored like a life annuity, then monthly payout should be from retirement age, either 62 or 65 in future, pay until 85 (20 years) but it doesn't stop and will continue payout till member dies, like a life annuity. It does not make sense for the govt to hold a % members money from their MMS till they reach 85, half of the members won't reach the age, those who does, will not maximise the full monthly payouts for long, we all know the average human lifespan. If it works according to how you posted, it is pretty clear they just want to hold on to part of members $ for their purposes.
Well until they announce it in detail