Date
28 April 2017
Hong Kong's proposed annuity scheme offers the benefit of fixed monthly income for retirees, but the plan would have worked better without the HK$1 million individual investment limit. Photo: HKEJ
Hong Kong's proposed annuity scheme offers the benefit of fixed monthly income for retirees, but the plan would have worked better without the HK$1 million individual investment limit. Photo: HKEJ

Public annuity scheme a good idea but investment cap too low

Hong Kong Mortgage Corporation plans to offer a public annuity scheme, which allows retirees to invest up to HK$1 million in exchange for stable monthly income for rest of their lives.

Taiwan, Japan, South Korea and many European nations have adopted similar schemes as one of the key pillar of the retirement welfare system.

Under the public annuity scheme proposed in Hong Kong, buyers can receive a fixed monthly payment, which shields them from market volatility.

For a HK$1 million upfront payment and assuming a 4 percent return, a 65-year-old person can expect about HK$5,800 a month for the rest of his or her life.

If investors are only concerned about getting a steady income, the scheme beats alternatives like US Treasury, which yields around 2.3 percent currently. Corporate debt, stocks and other investments can offer better returns, but they are relatively risky for retirees.

The net worth of many old couples in the city may be quite high, considering the properties they own could be worth about HK$8 million (based on the average size of around 500 square feet). But during retirement, they may still face financial difficulties as they have to live in their own flat, which means the property won’t be generating cashflow for other expenses.

Also, they won’t be entitled to any government subsidy as long as they own a flat.

The couple can resort to reverse mortgage in order to gain stable monthly income. However, many financial institutions offer very conservative valuation and fees could be expensive.

Which is why the annuity plan might be the right answer.

That said, the government should consider increasing the investment cap of HK$1 million, given that HK$5,800 monthly income is not enough to support a comfortable retirement life.

This article appeared in the Hong Kong Economic Journal on April 13

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal columnist

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