Tuesday, 15 December 2015

Is Deferred Annuity Plan Worth Investing? Unwrapping PRUretirement Growth Plan As A Case Study

Recently the topic on having a secure and consistent income upon retirement was raised again by a reader. As fear of economic uncertainty in our country grows, many are looking for investment plans that can offer guaranteed income.

Such a plan does indeed exist in the form of Retirement/Annuity Plan. By offering a guaranteed income payment over a fixed number of years plus a lump sum bonus at the end of the program, such plans are fast becoming a popular option for many Malaysian.

If you've ever been approached by a representative explaining about such plans, you would probably be impressed by the initial offer (guaranteed income does sound attractive huh) of the plan. However, looking at the big picture, are you really getting a good deal when investing into such plans?

Looking back 2 years ago, I unwrapped a similar program called Hong Leong Assurance Cash Promise. In that post, I pointed out that the Internal Rate of Return (IRR) for that plan was only slightly higher than the bank's Fixed Deposit Rate. 

Fast forward to the present, a reader recently wrote to me asking about a similar plan from Prudential. That has sparked my interest into finding out what the latest annuity plan has to offer. Has the return increased? Is there better a IRR now as compared to 2 years ago? Let us take a look....

PRUretirement Growth Annuity Plan 
All information for this review are obtained from this plan's brochure (with no added salt and pepper). You may download the brochure HERE.

What you'll get if you invest:

The plan uses key words such as RetirementGuaranteed Income and Inflation Factor as selling points:

Benefits are similar to other Annuity plans. Selling points of this plan are highlighted via the blue circles. Do take note that the "Lump sum payout" is non guaranteed, performance based:

Click to Enlarge Image
How does the plan work?
Simply put, you set aside a lump sum (termed as Single Premium) of your money for a fixed number of years. The plan refers to this period as "Accumulation Stage". 

Upon completing the Accumulation Stage, your annual guaranteed payout kicks in over a fixed number of years called "Payout Stage".

Amount of Annual guaranteed payout is based on a certain percentage calculated with reference to the Accumulation Stage vs Payout Stage. 

Check out the table below for a better representation:

Fortunately, the brochure provides an example on how the it works in 3 simple steps:

Here's the pictorial example:

What are charges and fees?
Like any other plans of similar nature, charges will be incurred on the investing portion, administrative portion as well as the insurance portion.

Some charges are deducted from your initial investment such as the Insurance Charge. Some are embedded into the daily unit price such as the Fund Management Charge, while some are deducted from your annual guaranteed payout such as Administrative Charge. 

If you intend to invest into this plan (or any other investment schemes), please make sure you find out specifically from the agent or consultant how each charges are calculated.

Check out the list of charges for this plan as obtained from the brochure.

Investment Amount?
The minimum investment amont is RM10,000. No maximum amount is set.

How does this plan invest your money during the Accumulation Period?
This is a first time that I see an Annuity Plan that invest into well Unit Trust Funds. Well before I elaborate further, please check out the table below:

If you are well versed with Unit Trust investment, you should understand the terms Equity Fund, Bond Fund and Cash.

If you have no inkling about unit trust, allow me to provide short explanation:
  • PRUlink Golden Equity Fund : A fund that invest into stocks (High Risk)
  • PRUlink Golden Bond  Fund : A fund that invest into bonds issued by Companies or Government (Low Risk)
  • Cash : Normally placed into Money Markets allowing your investment to still earn interest at about 2%-4% per annum.. 
If you still find difficulty understanding Unit Trust, just drop me an email at shanesee03@gmail.com

Now back to the table above,. As you can see that the longer your Accumulation Period, the higher the % allocation is towards riskier investment, in this case the Equity Fund. This is a common strategy and a known fact that if you have a longer period to invest, you can afford to take more risk.

A 40 year Accumulation Period on the table indicates that 60% of your invested amount will be invested into equity fund and only 40% goes to the bond fund. 

On the other hand, a 5 year Accumulation Period sees 75% of the invested amount allocated to Bond Fund and the remaining into 25% into equity.

What about your investment during the Payout Period?
The investment strategy depends on the term selected for Payout Period. 

Referring to the same table above, for Payout Period 5 Years and 10 Years, no investment will be made on your invested amount. For 15 Years till 30 Years Payout Period, your invested amount will be parked under the "PRUlink Golden Managed Fund". This fund's allocation is 20% into Equity and 80% into Bonds or Cash.

What is the Internal Return of Rate for this plan
Ah.....the highlight of this post.

For any investor, the end game is to determine the worthiness of an investment plan via its returns. The Internal Rate of Returnb (IRR) is the standard gauge used by me when it comes to evaluating an investment plan.

Let us take the example provided by this plan's brochure for calculation purpose.

Key Information
  • Investment Amount (Single Premium) : RM100,000
  • Accumulation Period : 15 Years
  • Payout Period : 20 Years
  • Guaranteed Amount Per Year (during Payout Period) : RM7,000
  • Expected Lump Sum payout at end of Payout Period (High returns) : RM282,917
  • Expected Lump Sum payout at end of Payout Period (Low returns) : RM11,972
From the above, the expected total amount you will get at the end of your plan is
= 20 years of Guaranteed Amount + Lump Sum Payout

Scenario 1 : Calculation (High returns on Fund Investment)
= (RM7,000 x 20 years) + RM282,917
= RM140,000 + RM282,917
= RM422,917

Scenario 2 : Calculation (Low returns on Fund Investment)
= (RM7,000 x 20 years) + RM11,972
= RM140,000 + RM11,972
= RM151,972

IRR Calculation for Scenario 1 (High Returns):

Click to Enlarge Image

IRR : 4.76% per annum

IRR Calculation for Scenario 2 (Low Returns):

Click to Enlarge Image

IRR : 1.63% per annum

Compare with saving RM100,000 in a Fixed Deposit Account @ 3.5% per annum?
Let us calculate the total returns over with the same scenario as this plan but invested in a secure PIDM guaranteed Fixed Deposit Account.

Key Information:
  • Initial Deposit : RM100,000
  • Fixed Deposit Rate : 3.5%
  • 15 years of compounding with no withdrawals
  • Next 20 years of compounding but with annual withdrawals of RM7000
Total Amount Obtain at the end of 35 Years
= (RM7000 x 20 Years) + (Balance in FD at the end of 35 Years)
= RM140,000 + RM128,472.75
= RM268,472.75

Balance FD calculation

Let us compare all the calculations above in a single table below:

Based on the calculations above, the IRR for PRUretirement Growth Plan may range between 1.63% to 4.76% per annum. 'In other words, there is an ambiguity for you as an investor if you are looking for a guaranteed plan. The only guaranteed part of this plan provides an IRR of 1.16% per annum.

However I'm not going to place any judgement on this plan. The facts and figures are laid before you. Perhaps having a plan that provides fixed income for the next 20 years with a possibility to earn a higher return coupled with insurance protection is indeed a wise decision?

The choice is yours. May the force (in this case the smarts) be with you.

Cheers and happy investing!

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