Hong Kong has a high cost of living index. For many employees, clothing, food, housing and transportation are all about spending money. They often need to have a detailed budget plan to avoid overspending. Beyond their daily expenses, how many people will plan ahead and save or invest part of their income for their future retirement?

Everyone wants to retire with ample reserves and without having to worry about money. According to survey results¹ released by the Hong Kong Deposit Protection Board in September 2019, prospective retirees aged between 50 and 65 believed on average that they needed to have savings of HK$5.24 million to have a sufficient "sense of security" for retirement. It seems unlikely that savings and MPF alone can fully guarantee a satisfactory salary-free retirement. As a result, people are increasingly paying attention to financial products for retirement, especially annuity plans.

In September 2019, the Consumer Council analysed 37 annuity plans², 12 of which were qualified deferred annuity policies. It pointed out that there were significant differences between the different plans in terms of the amount of premium, the period of premium payment, the return rate, etc., and recommended applicants to make prudent choices. Moreover, based on the average inflation of around 3% over the past 10 years³, the guaranteed internal rate of return of most qualified deferred annuity policies is below the inflation rate. So the key question is: are annuities still worth insuring against?

Going back to the basics, applicants must clearly understand the main function of the annuity and the purpose of applying for insurance. Annuity is a long-term retirement insurance product that hedges the risk of retirement without income. It provides long-term and stable cash flow for the policyholder to meet his or her daily expenses and secure their retirement life. The main function of an annuity is to provide a steady income over the long-term which the policyholder can rely on for retirement.

Applicants should select and apply for suitable insurance plans based on different factors such as one’s financial condition, life planning, affordability, etc. Also, they need to ensure they have the ability to pay the premium as scheduled, and have enough working capital in reserve to prepare for unexpected needs.

In particular, as the younger generation is decades away from retirement, they should make plans for their retirement life as early as possible. However, young policyholders should pay special attention to liquidity risks. There may be a lot of variables during the premium payment period. If a large amount of capital is required (e.g. marriage, property purchase) and the policy is surrendered early, they may suffer losses.

A retirement financial portfolio should also be diversified, which balances the risks and returns of each product and increases the value of retirement reserves. Of course, annuities can help enhance one’s retirement protection, but policyholders should also ensure that they have a diversified income so that they have adequate sources for their retirement funds during their old age.