Building your retirement nest egg

From ST, Invest

By Lorna Tan

At least half of Singapore's population is not financially ready for retirement, according to a recent global survey.

Of the 600 Singaporean working adults and retirees covered in the AXA Retirement Scope 2007 survey, only half had done retirement planning. In contrast, 85 per cent of workers in the United States have started retirement planning.

The good news: In the light of recent events, the dismal figure for Singapore should improve.

Thanks to the recent publicity over changes to the Central Provident Fund (CPF), retirement issues are a hot topic now.

Announced in August, the changes include the Government paying higher interest rates on a portion of CPF savings, and making it compulsory to take up an annuity.

It is no wonder that insurers such as Prudential Assurance, UOB Life and Manulife have been quick to recognise the need for innovative retirement solutions. Of late, there has been a flurry of marketing activity - with more retirement products likely to hit the market soon.

What's your number?

Mr Goh Yang Chye, the managing director of GYC Financial Advisory, believes that many Singaporeans are not aware of how much income they will need for their retirement. Nor do they know how to begin retirement planning.

'Start by asking yourself what kind of retirement you want. Do you wish to enjoy a standard of living similar to what you enjoy today? Based on your desired retirement lifestyle, you can work out your retirement goal and start building your retirement nest egg,' he said.

This objective formed the basis of Prudential's 'What's your number?' campaign, launched last month. It has worked out the likely expenses for five retirement lifestyles.

The model throws up a lump-sum savings goal, assuming a 20-year drawdown period in retirement after age 65. It also assumes a 1.5 per cent inflation rate and a 5 per cent investment rate of return.

The most modest lifestyle of the five - 'Budget' - assumes household spending of $1,040 a month for 20 years. This works out to a targeted savings pot of $195,000.

For a 'Modest' lifestyle, monthly spending is assumed to be $2,345. For this lifestyle, you would need to build up savings of $450,000.

The most luxurious is the 'Comfortable' lifestyle, for which monthly expenses are assumed to be $5,170. To keep up this lifestyle, you would need savings of $1,013,000.

Prudential's assistant director for marketing products, Mr Daniel Lum, said individuals can access its website at www.whatsyournumber.com.sg to identify their lifestyle aspirations, as well as how much monthly savings they would need to reach their retirement goals, assuming a specific rate of return.

Whole life plans with lifetime payouts

Instead of a lump-sum premium outlay as required for an annuity, these plans allow for progressive saving over eight or 10 years to build a retirement nest egg.

A hybrid of whole life and endowment plans, they come with regular payouts. A major plus is that they are paid out for as long as the assured is alive, just as with annuities.

The exception is the AIA Platinum Rewards plan, where the cash payments, also known as coupons, are paid out till the assured turns 100. They are denominated in US dollars.

The fixed annual premiums are paid for a limited period only. The period is eight years for AIA Platinum Rewards and UOB Life Maxi Future, and 10 years for Manulife 3G.

With both UOB Life and Manulife, for a 30-year-old woman who has a sum assured of $100,000 for her baby, the annual premiums would range from about $8,000 to over $9,000.

Policyholders enjoy regular payouts with a guaranteed component of at least 2 per cent of the sum assured, after the premiums are paid up. There is also a non-guaranteed annual dividend, based on the performance of the insurer's life fund.

Such plans give the customer the chance to enjoy a lifetime of income and the option of leaving behind a legacy by taking up a policy on his child's life.

In this case, the policy owner can draw the cash coupons for as long as he likes up to the time that he is ready to assign the plan to his child. After that, the child would get the yearly cash coupons.

Based on a guaranteed cash payout of 2 per cent and a non-guaranteed dividend of 2.2 per cent of the sum assured, Manulife worked out that the total projected payout would be $515,904 after 85 years of cover. The premiums would add up to $82,500.

Calling such plans 'a no-brainer', Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, said he liked the feature of having lifetime guaranteed coupons that would not be hurt by market fluctuations.

'This plan can be considered part of an additional diversification in an investment portfolio,' he said.

Both AIA and UOB Life offer a benefit that covers 30 critical illnesses for an additional premium. In the case of UOB Life, the single premium for this benefit with a sum assured of $100,000 for 30 years would be $2,900 for a non- smoking male aged 30.

Here is Mr Lim's take on the plans' pros and cons.

AIA Platinum Rewards

Pros

• The guaranteed cash payout of 3 per cent of the basic sum assured is the highest for all three insurers. Manulife and UOB Life come in at 2 per cent of the basic sum assured.
• The dividends, if left to accumulate with the insurer, are also the highest at 4.25 per cent. This rate is not guaranteed.

Cons

• As the plan is denominated in US dollars, there is some currency exchange risk, but if a person needs US dollars, this issue might not apply.
• The high 'entry' level of about $8,500 probably places this plan out of the reach of both lower- and middle-income consumers. It is targeted at the mass affluent market.
• The yearly payouts will cease if and when the assured reaches the age of 100.
• The assumed projected investment rate of return is the highest at 5.75 per cent.

Manulife 3G

Pros

• This plan is priced at a level that appeals to the widest segment of the population, with entry premiums of just over $1,500.
• The assumed investment return of 4.2 per cent, comprising both guaranteed and non-guaranteed payouts, is pretty decent.
• These payouts are made during the assured's lifetime.

Cons

• The assumed investment return of 5.25 per cent is the highest for Singdollar participating products.

UOB Life Maxi Future

Pros

• It assumes a lower projected investment return of 4.5 per cent.
• Payouts are made during the assured's lifetime.

Cons

• The fact sheet did not provide a specific figure for the non-guaranteed portion of the annual dividend.

Other retirement alternatives

Rather than relying on retirement options with an insurance component, some financial advisers prefer to advocate separating insurance from investments.

'The best way to insure oneself is simply to buy a no- frills insurance plan. And the best way to manage one's investments successfully with consistent returns is to have a simple portfolio management of equities, bonds and cash,' said Mr Goh.

Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, prefers the flexibility of lump- sum investments plus future top-ups on a globally diversified portfolio of funds.

This strategy allows free switching to re-balance the portfolio periodically. Also, regular or ad hoc withdrawals can be made when the need arises by liquidating the fund that has gained the most in value.

Mr Goh worked out that, if a customer bought a term policy with a sum assured of $100,000 and invested the rest of the 10-year annual premiums of $8,250, the projected total returns would be $753,548 based on an investment return of 5 per cent, after 85 years.

The customer could also expect to receive an annual cash payout of $4,200 after 10 years. If a higher investment return of 7 per cent were assumed, the projected amount would be $9.13 million.

Nevertheless, even for people who are averse to risk in terms of investing, it is better to have a 'not so good' financial plan than no financial plan at all, added Mr Goh.

Choosing an adviser for your insurance needs

From ST, Invest

By Lorna Tan

In recent years, there has been a proliferation of consumer guides to help people make better choices when buying life insurance.

This shows that people are becoming increasingly aware that insurance is an essential aspect of money management.

It also shows that they need help to work their way through a maze of insurance jargon and legalese.

The latest and arguably most authoritative guide comes from the Life Insurance Association which recently published an improved version of its guide to life insurance.

Financial advisers and insurance agents have been handing out the new guide to clients since Oct 1.

Besides this, customers also get other documents, such as a reference checklist, a product summary and benefit illustration, when they are buying insurance.

One important new feature in the latest guide is an easy-to-follow flowchart that describes the 'Comprehensive Advisory Session' that should take place when a consumer meets a financial adviser to discuss life insurance options.

This underscores key changes in attitudes on how insurance should be sold. The sale of insurance is now part of a financial advisory process; it is not simply a product to be pushed so an agent can earn quick and fat commissions.

But a successful insurance industry needs both sides to work hard. Qualified advisers with integrity are vital, but so are informed consumers who know what to expect from advisers.

The main types of complaints from insurance customers are: getting misinformation on insurance and bad recommendations on what products to buy from advisers.

Take the experience of Mr Larry Ho, for example. In February 2004, at the age of 53, Mr Ho signed up for a regular premium investment-linked insurance plan with a death cover of $1 million.

This type of plan is a blend of an insurance policy and an investment; a portion of the premium is invested in stock markets, for instance.

After a few years of paying the premiums, he now realises that the plan was not what he really wanted.

He had wanted to invest his money for the long term and an investment-linked plan was not the best way to achieve that result given the changing proportion of funds invested.

'I had not been advised that as I get older, more of my premiums go into paying for assurance charges than for investments,' he said.

So how does a consumer pick a capable financial adviser from the wide selection on the market?

What to ask your adviser

MANY people buy life insurance from friends and relatives because it is convenient. Still, this may not necessarily be a good thing as the close ties sometimes make it difficult to ask pointed questions.

And there are hazards, too.

Mr Ben Fok, the chief executive of Grandtag Financial Consultancy, said that it is not a good sign if the adviser tries to push you into signing up as a client on the spot.

'This can be a bad sign. Refuse politely and continue asking questions. You are looking for an adviser, not a salesperson,' he said.

Here is a checklist of key questions to ask your potential adviser:

1. What services can you provide?

Find out if the adviser offers cost-effective solutions from multiple product providers or if the products he recommends are restricted to one source.

Some consumers feel safer with advisers and products from large, well-known institutions. Others may want to deal with advisers that offer a wider choice of products.

2. Who else could benefit from your recommendations?

An adviser who promotes insurance, unit trusts and stocks may have separate tie-ups with the firms that supply these products.

He may also have other business relationships that should be disclosed to you. This includes income he receives for referring you to an insurance agent, an accountant or a lawyer in relation to recommendations that he makes to you.

3. What are the risks and disclaimers?

Don't hesitate to ask the adviser to highlight any risks, potential downside or restrictions that may apply to the product he is recommending.

Ms Wendy Lee, 40, suffered a rude shock when she realised, after her divorce, that she was unable to change the person who would be a beneficiary of her life insurance policy.

She was not told at the point of sale that an 'irrevocable statutory trust' is created - under Section 73 of the Conveyancing & Law of Property Act - for the spouse and/or children when they are named as beneficiaries in a policy.

In simple terms, that means her ex-husband is entitled to the insurance proceeds because he was named as the beneficiary when the policy was taken out.

Even having a will does not change this situation.

4. How do I pay for your services?

Payment can take several forms.

• Commissions paid by a third party for the sale of products. These are usually a percentage of the amount you invest in a product.
  
• Fees based on a percentage of the assets you invest.
• A combination of fees and commissions. Fees are charged for the amount of work done to develop financial advisory recommendations and commissions are received from any products sold. Some planners may offset a portion of the fees you pay if they receive commissions when you buy products they recommend.
• A salary paid by the firm for which the adviser works. The adviser's employer receives a payment from you or others, either in the form of fees or commissions, in order to pay the planner's salary.

5. What commissions do you earn?

Don't be afraid to ask the exact commission amount that the adviser will earn from the sale. For instance, the commission for a regular premium investment-linked plan can be as high as 50 per cent in the first year, before dropping to 25 per cent in the second year, 10 per cent in the third year, and 5 per cent each in the fourth, fifth and sixth policy years. This means that if the annual premium is $50,000, the first-year commission earned by the adviser is a substantial $25,000.

For a single premium investment-linked plan, the one-time commission is typically a much smaller 2 per cent to 3 per cent.

In the case of hospitalisation Shield plans, some generate first-year and renewal commissions of up to 25 per cent and net premiums of 15 per cent for the adviser, as long as the plan stays in force.

6. What experience do you have?

You have a right to be nosy. Find out the adviser's experience and the number and types of firms which he has been associated with. Some experts advise consumers to choose an adviser with at least three years of experience in providing financial advice.

7. What qualifications do you have?

Ask the adviser what qualifies him to offer financial advice and whether he holds or has held any financial planning designation.

If the answer is yes, check on his background with the respective organisations.

8. Can I have it in writing?

Ask the adviser to put in writing the services he has provided and the recommendations he has made. Keep this document for future reference.

Necessary documentation

Finally, an adviser should give you the following documents when recommending a financial product, says IPP Financial Advisers. They include:

• A summary of your financial information such as investment objectives, current financial situation and personal needs.
• Recommendations made by the adviser and the basis for making these recommendations.
• A copy of the benefit illustration and product summary for insurance products.
• A copy of the prospectus for unit trusts.
• The name of the firm he represents and the type of advisory service he is licensed to provide.

If all this sounds like too much trouble, consider the problems faced by Mr Albert Soon simply because a critical illness policy was not explained properly when he bought it.

He thought he was properly covered for all serious illness when he bought the critical illness policy.

But the 52-year-old had a rude shock when his claim was rejected by his insurer early last year.

After feeling breathless and bloated in December 2005, he was diagnosed as being at a high risk of sudden cardiac death and had a pacemaker implanted.

The insurer threw out his claim, explaining that his medical condition did not fulfil the definition of any of the 26 major illnesses stipulated in the plan.

To make matters worse, he had not purchased a hospitalisation and surgical plan.

Thus it is always better to protect yourself by having an inquiring mind and being well-informed, as opposed to assuming that all advisers will automatically have your best interests at heart.

On the flip side

Much has been said about unprofessional advisers but many advisers have stories of encounters with 'unscrupulous' customers too.

Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, recalled a 'nasty client' who invited his entire family of five for dinner at an expensive Chinese restaurant, during their first meeting.

'He had already pre-ordered food and made me pay for dinner, which came up to over $500. After a few meetings and agreeing to buy a policy for himself and his wife, he finally cancelled the policies.

'He was the most nasty client in my 10 years of working as a financial adviser,' recalled Mr Lim.

Other advisers have also had their fair share of clients willing to play hard when it comes to getting the best deal.

They obtain advice and recommendations from one adviser and then proceed to shop around for cash rebates and negotiate for better terms.

3rd insurer unveils new ElderShield package

From ST, Singapore

Aviva's unique offers include payouts for those who recover slightly from disabilities, and for kids whose parent is disabled

By Salma Khalik

People 40 years and older have a wide range of schemes to choose from to protect themselves financially against severe disability, with the final insurer, Aviva, releasing its schemes yesterday.

Among its new offerings are monthly payouts for people with severe disabilities who are recovering and money for children under 21 when a parent is disabled.

Between them, the three insurers - Great Eastern (GE), NTUC Income and Aviva - offer combinations of longer coverage and higher payouts, up to a maximum of $3,500 a month for life.

ElderShield, the national severe disability insurance scheme, was revamped recently so that people who join from this month will get a payout of $400 a month for six years should they qualify - up from $300 a month for five years for people who joined earlier.

Once on the basic scheme, they can opt to buy one or more supplementary schemes from any insurer.

Premiums for the supplementary scheme can be paid with Medisave money - the portion in Central Provident Fund savings reserved for health care - up to a cap of $600 a year.

Health Minister Khaw Boon Wan was pleased at the buffet offered, but cautioned people to study the various schemes carefully before picking one that 'provides best value for money and within their affordability level'.

He told The Straits Times yesterday: 'The supplements cover a good range of payouts and should meet the diverse needs of most Singaporeans who want and can afford higher payouts than what the basic ElderShield provides.'

All three insurers have retained the basic criterion for payouts - when a person is unable to do three of the following without help: bathing, eating, going to the toilet, walking, dressing or getting out of bed or a chair.

Newcomer Aviva has tried to be creative with some unique offers.

These include giving a 50 per cent payout if the person recovers slightly, but still is unable to do two of the six activities of daily living. The basic scheme stops payment when this happens.

It also provides a $200 a month additional payment for three years if the policyholder has children younger than 21 years of age.

Policyholders also enjoy discounts at public hospitals in the National Healthcare Group for services such as health screening and podiatric treatment.

The last is especially useful to diabetics, who need such treatment at least once a year.

Like its rival NTUC Income, Aviva also offers lifetime payouts. Alternatively, policyholders can opt for a 12-year payout period.

The amount of coverage ranges from $600 a month to $3,500 a month, including the basic ElderShield payout.

It also gives the option of paying premiums till the age of 65, or for as long as one lives, at lower rates. Whichever is chosen, coverage is for life.

Its marketing head, Mr Paul Hughes, expects most people to choose a monthly payout of $800 to $1,000. He said premiums for such schemes for people up to 55 years old should be completely payable by Medisave. In fact, for most people, the premium can be paid for simply with interest earned on the Medisave accounts.

Like GE, it offers a lump sum payout of three months at the start of the claim, and a death benefit should the person die during the claim period.

Member of Parliament Lam Pin Min said the range of schemes is 'a good start', but he thinks the premiums could be lower and hopes that excess income would be returned.

He advised people to choose carefully: 'They should be realistic yet practical in their choice so that they do not over-insure themselves unnecessarily.'

But Madam Halimah Yacob, head of the Government Parliamentary Committee for Health, wanted the insurers to go further, for example, by providing payouts for people who need help but fail to qualify under the current scheme.

See Supplementary Cover: What the 3 companies recommend