Dear Mr Tan
I am approaching age 55. Should I leave my minimum sum in the CPF to earn 4% per annum, or take it out to buy a life annuity? I am confident that you can give your impartial advice. Thank you.
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REPLY:
You should take to an insurance adviser from NTUC Income or visit the business center to talk to a salaried adviser. You can compare the difference and make the best decision for yourself.
In my frank view, the life annuity with NTUC Income is likely to earn a long term rate of return of about 4-5% per annum. This should be as good as CPF or slightly better.
However, the life annuity has an element of risk pooling. It guarantees payment of the annuity for as long as you live. You do not have to worry that your money will run out earlier. (In the case of the CPF, the money is expected to run out after 20 years (ie when you reach age 82).
However, if the annuitant dies younger, a part of the principal or interest is left behind in the pool to pay the benefit to those who live longer.
There are also difference in the amount of payment. The life annuity from NTUC Income pays out less during the initial years and increases with bonus. The rate of bonus vary yearly according to the investment yield.
If you are not sure, it is all right to leave the money in the CPF to earn 4% per annum. This is an attractive rate of return.
Do take your time, before you make a decision. Either way, you should be happy with the decision. In both cases, the products give good value to the customer.
Monday, July 16, 2007
Did you invest in these structured products?
This webpage contains an insightful analysis of the structured products sold in Singapore in recent years, including the MiniBond.
It is quite easy to read.
If you have invested in some of the structured products previously, can you tell me about your actual experience. Did you get a good return from the product?
If the product has still not matured, call the product issuer, and ask what is the current price today, if you redeem it now.
It is quite easy to read.
If you have invested in some of the structured products previously, can you tell me about your actual experience. Did you get a good return from the product?
If the product has still not matured, call the product issuer, and ask what is the current price today, if you redeem it now.
Risks of investing in Structured Products
COMMENT POSTED IN MY BLOG:
The credit default swap is to insure its credit exposure. Therefore in the event of a default, the loss is mitigated. It is like buying future or option to hedge against a downside risk. The fund managers use plenty of these derivatives. If you look at Income's funds quite a substantial amount is spent annually on theses derivatives. Therefore it is no surprise that synthetic fixed income like Minibond uses too.
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REPLY:
Some structured products invest in credit default swaps to enhance their yields. They sell the swaps (i.e. to assume the risk of the credit event, by offering the insurance protection).
In the event of a credit event, the sellers of the swap (i.e. the investors of the structured product) can suffer a big loss. This is why the investors are warned that you may lose part or all of your investments.
Is the risk small? I do not know. I do not have the data to calculate it.
Lesson: Do not invest in any product that you do not fully understand. You may be exposing your investment to large risk. Stay away from complicated structured products!
SIDE NOTE:
NTUC Income invests in swaps to minimise the risk of loss. They have to pay a small cost for this protection.
The structured products invest in credit default swaps to earn an increased yield, but are exposed to the potental of a large loss, when a credit event happens. Is this frightening?
The credit default swap is to insure its credit exposure. Therefore in the event of a default, the loss is mitigated. It is like buying future or option to hedge against a downside risk. The fund managers use plenty of these derivatives. If you look at Income's funds quite a substantial amount is spent annually on theses derivatives. Therefore it is no surprise that synthetic fixed income like Minibond uses too.
------------------------------------
REPLY:
Some structured products invest in credit default swaps to enhance their yields. They sell the swaps (i.e. to assume the risk of the credit event, by offering the insurance protection).
In the event of a credit event, the sellers of the swap (i.e. the investors of the structured product) can suffer a big loss. This is why the investors are warned that you may lose part or all of your investments.
Is the risk small? I do not know. I do not have the data to calculate it.
Lesson: Do not invest in any product that you do not fully understand. You may be exposing your investment to large risk. Stay away from complicated structured products!
SIDE NOTE:
NTUC Income invests in swaps to minimise the risk of loss. They have to pay a small cost for this protection.
The structured products invest in credit default swaps to earn an increased yield, but are exposed to the potental of a large loss, when a credit event happens. Is this frightening?
Credit Default Swaps
The Pinnacle Notes has a "credit event". If any of 5 entities default, the investor has the chance to lose up to 40% of the invested amount.
What is the likelihood of this happening? I checked the internet for "credit defaults".
I found a link to "credit default swaps" or CDS. It appears to me that the Pinnacle Notes have CDS built into the product.
I find it quite complex to understand the CDS, especially to calculate the chance of a "credit event" occuring.
You should read the section on "Criticism". It quotes Warren Buffet.
Lesson: If you are not able to understand a product, do not invest in it. You do not know if you are getting a fair deal.
What is the likelihood of this happening? I checked the internet for "credit defaults".
I found a link to "credit default swaps" or CDS. It appears to me that the Pinnacle Notes have CDS built into the product.
I find it quite complex to understand the CDS, especially to calculate the chance of a "credit event" occuring.
You should read the section on "Criticism". It quotes Warren Buffet.
Lesson: If you are not able to understand a product, do not invest in it. You do not know if you are getting a fair deal.
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