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Want To Invest For Your Retirement But Are Afraid To Lose Money? Here’s How A Variable Annuity Plan Can Help

A retirement plan that gives you a higher return when market does well, along with a ratchet feature that locks in gain once it’s earned. 


This article was written in collaboration with HSBC Life. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any investment losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.

With the highest global average life expectancy at 84.8 years, it should come as no surprise that being able to retire comfortably is an important financial goal for many Singaporeans.

At the same time, retirement planning can be daunting for many, particularly if you are not good in managing your investment. For example, if you had the bulk of your retirement portfolio invested into equities at the start of 2020, you would have suffered what can be considered as an emotional roller coaster ride thus far in 2020.

Using the S&P 500 index as a reference point, a $1 million investment portfolio at the start of the year would now be worth about $690,000 as of 23 March 2020.

And with interest rates dropping to historic low, investing in safe, government bonds for yield would not give you a good return either.

While the decline in the financial markets in 2020 due to COVID-19 was an event that nobody could had anticipated, this is not the first recession that we have experienced. Past recessions including the 2000 dot-com bubble, the 2003 SARS Outbreak and the 2008 Global Financial Crisis have also caused stock market crashes in the past. If you were invested during these times, you would have seen your investment portfolio lose a sizeable chunk of its value.

This leads to another question. While we know that it’s important to invest, and that we cannot avoid the volatile nature of the stock markets, how can we ensure that we continue to grow our retirement nest egg while not having to feel like we are constantly in a 360-degree roller coaster ride?

#1 CPF LIFE Scheme

In Singapore, our CPF savings form the foundation of our retirement income.

As soon as we start work, we begin making CPF contributions, which earn guaranteed, risk-free interest of between 2.5% to 6%. Part of these funds are channeled into our Retirement Account, which is used to provide us with monthly CPF LIFE payouts during our retirement.

The various CPF accounts help us to grow our retirement nest egg in a predictable, risk-free manner, without having to worry about the volatility in the stock market. At age 65, we also start receiving monthly lifelong payouts from CPF LIFE.

#2 Investment Properties

Another retirement planning instrument for Singaporeans is investment properties, which can be rented out for retirement income.

Compared to the stock market, property prices tend to be less volatile in the short run. However, the value of your property can go down during poor market conditions and that unlike our CPF LIFE payouts, rental income is never guaranteed and may decline or even fall to zero if the rental market is weak. Property owners also incur additional costs for their investment properties such as property tax, monthly maintenance fees and agent fees.

# 3 Variable Annuity Plan

While utilising our CPF savings and buying an investment property are common ways many Singaporeans will consider as part of retirement planning, neither options allow us to have exposure to the equity markets.

If we wish to participate in the growth of the equity markets to help build our retirement portfolio, without needing to be worried about the roller coaster rides that the equity markets will give us, we can consider purpose-built retirement planning products such as a variable annuity plan.

HSBC Life Variable Annuity is an example of one such retirement instrument. It’s a single-premium monthly income plan that invests your money into the financial markets while guaranteeing your initial investment upon the end of the policy term.

Investing While Protecting Their Downside With A Unique “Ratchet” Feature

The HSBC Life Variable Annuity has a novel “ratchet” feature that helps policyholders lock in any gains earned during favourable market conditions on a monthly basis.

How the “ratchet” feature works is that it locks-in the higher account value each month and becomes the Guaranteed Payout Base (GPB)*. This GPB does not adjust downwards even if markets were to fall subsequently. When the market goes up and the account value increases beyond the previous locked-in value, the “ratchet” feature will kick in again to lock-in the new (and higher) locked-in value.

Source: HSBC Life Variable Annuity Product Brochure

As seen in the diagram above, the payout* can only go up and never go down as provided by the “ratchet” feature under this product.

* You will get back at least 100% of the single premium paid in the form of the monthly payouts throughout the payout period selected provided there is no partial withdrawals made during the policy term and the policy is held until maturity. 

Choose Your Own Accumulation & Payout Period

As a variable annuity plan, you get to choose both your accumulation and payout periods. For example, after a one-time single premium investment (in US Dollars only), you can choose your preferred accumulation period of 10 years, 15 years or 20 years. You can also decide how long your monthly payout period will be: 10, 20 or 25 years.

For example, a 40-year old who chooses a 20-year accumulation period can look forward to receiving monthly payouts from age 60 onwards for a period of 10 or 20 years.

Source: HSBC Life Variable Annuity Product Brochure

It’s worth pointing out also that the “ratchet” feature continues to be in effect not just during your accumulation period, but also your payout period. This means that even after you start receiving your payouts, your payout can still increase if the market continues to perform well. However, it will never go down.

The “Ratchet” Protects Your Investment While The Market Continues To Deliver You Returns

The “ratchet” feature in the plan is incredibly important because it helps lock-in your gains and protect against downside risk. So, while investors get to participate in the upside of the equity markets, they are also protected from wild downward swings when it does happen, similar to what we are currently experiencing today because of the COVID-19 pandemic.

Capital Guaranteed Potential Upside If Market Performs Well Fixed Guaranteed Regular Payout Liquidity
CPF Savings Yes No Yes Low
Investment Properties No Yes No Low
Variable Annuity Plan Yes^ Yes Yes* High (anytime with no surrender charge)

 ^ Your capital is guaranteed only if you hold the policy to the end of the policy term and provided you have not made any partial withdrawals.

In the unlikely event that the market falls throughout the policy term and never recovers from the day policyholder first invests, the policy will guarantee the capital invested and the policyholder will receive their initial capital back.

Source: Product brochure, HSBC Life Variable Annuity

With HSBC Life Variable Annuity, there are no surrender fees and you can make partial withdrawals if you need your funds earlier. Ideally though, you would want to leave your investment monies untouched to reap the full benefits from the plan. If you surrender your policy before maturity or make any partial withdrawal during the policy term, you will receive the prevailing account value, and not the Guaranteed Payout Base (GPB) amount.

That said, investors should always invest in a product with a suitable investment time horizon, and to build their retirement nest egg steadily.

The key advantage for HSBC Life Variable Annuity is that it allows you to participate in the growth of the financial markets, while still protecting your investments against inevitable market downturns. This could be a complementary solution to add into the retirement portfolio that you have carefully constructed especially if you have a long enough investment horizon.

The HSBC Life Variable Annuity is also an Awarded Winner of the Insurance Asia Award 2020 – New Insurance Product of the Year. To better understand this product better, do visit HSBC Life website for the product brochure and explanatory video. You may also find out more from a licensed representative.

Disclaimer

HSBC Life Variable Annuity is underwritten by HSBC Insurance (Singapore) Pte. Limited (Ref.No.195400150N).

This article contains only general information and does not have regard to the specific investment objectives, financial situation and particular needs of any specific person. It does not constitute an offer or recommendation to buy the product. A copy of the Product Summary is available and may be obtained from the authorised product distributor. You should read the Product Summary for details and seek advice from a qualified financial adviser before deciding and making a commitment to buy the product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. As buying a life insurance policy is a long term commitment, an early termination of the policy usually involves high cost and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. Please also refer to the policy contract for the exact terms and conditions, specific details and exclusions of this product.

Information is correct as at 21 July 2020.

This advertisement has not been reviewed by the Monetary Authority of Singapore. Protected up to specified limits by SDIC.