When it comes to an “annuity”, you probably think it is irrelevant to you especially for young adults. However, financial planning is actually a life-long activity for people of all ages. The “Qualified Deferred Annuity Policy” (QDAP) launched by the government could be an example of that. It is not only suitable for people approaching old age as it ensures stable long-term income in retirement, but is also beneficial for young adults as a tool for long-term financial planning and tax deductions. The following are the most common misunderstandings about QDAP, and let’s clarify them one by one:
Misunderstanding no.1 on deferred annuity – available only for the elderly
For example, Manulife’s ManuLeisure Deferred Annuity specifies that the earliest premium payment period can start from the age of 18. Similarly, Sun Life’s Foresight Deferred Annuity Plan also allows annuitants to start premium payments as early as 18 years old. Therefore, QDAP is not limited to the elderly, and eligible persons can actually plan for better future protection by buying an annuity as early as possible.
Misunderstanding no.2 on deferred annuity – lump sum premium in HK$ only
A special feature of QDAP is that, unlike the “Public Annuity” launched previously, no lump sum premium is required. There are different choices of payment options provided by QDAP, such as monthly or annual payments or by instalments, which provide flexible arrangements for financial planning as the annuitants gradually move towards the income receiving period. For example, Manulife’s ManuLeisure Deferred Annuity provides payment options of “annual”, “semi-annual”, “quarterly” or “monthly”.
QDAP is not only denominated in HKD, but there are USD and RMB policies available. For example, both AXA and AIA offer QDAP denominated in USD. In addition, Manulife’s ManuLeisure Deferred Annuity is also denominated in US Dollars.
Misunderstanding no.3 on deferred annuity – deferred annuity is a financial product only
The Government provides tax deductions for premiums paid for QDAP as a means to promote QDAP. Taxpayers are eligible to claim a tax-deductible amount equivalent to the premiums paid for purchasing QDAP, subject to a maximum of HK$60,000 annually . Furthermore, what makes tax deductions for QDAP unique is that they can be “shared” between married couples. If the husband/wife has purchased QDAP and he/she has not claimed the maximum tax-deductible amount, as long as both of them have chargeable income, the remaining balance can be claimed by his/her spouse. The tax deduction per individual is capped at $60,000, and the maximum tax-deductible amount of a married couple can be up to $120,000. The actual tax savings depend on the tax rate of the individuals involved.
Misunderstanding no.4 on a deferred annuity – only basic special offers are available for buying an annuity
In order to promote QDAP, many insurance companies provide additional special offers to attract customers. For instance, Manulife’s ManuLeisure Deferred Annuity provides a basic offer of 3% to 12% premium discounts depending on the premium payment period and premium amount. The premium discounts can be upgraded to 5% to 16% for policyholders of Manulife’s VHIS standard plan or flexi plan. Similarly, annuitants of Sun Life’s Foresight Deferred Annuity Plan can enjoy a basic offer of 5% premium rebate.
In addition, Manulife provides immediate cash if the life insured is diagnosed with cancer, stroke or a heart attack during the annuity income period to ease one’s financial burden. Manulife also provides “premium holiday” arrangements for up to two years at any time after the second policy anniversary, during which time all premium payments and the guaranteed cash value will be frozen.
Misunderstanding no.5 on a deferred annuity – one type of “rate of return” only
If you intend to purchase QDAP, you must pay attention to the actual meaning of the “rate of return” specified in the promotional leaflets. To have a better understanding of an annuity product’s returns, you should refer to the product’s Expected IRR (internal rate of return) which includes both guaranteed and non-guaranteed returns. The Insurance Authority currently requires that insurance companies must prescribe the IRR or the Guaranteed IRR in the prospectus of deferred annuity products.
Furthermore, there is also a “Non-guaranteed IRR” for consumers’ reference. For example, the “Guaranteed IRR” is 1.50% to 1.74%, for Manulife’s ManuLeisure Deferred Annuity with annual premium payment, whilst the expected total IRR may be as high as 3.85% to 4.30%.
QDAP: Long-term stable financial arrangement for both young people and the elderly
The above analysis refutes the common belief that QDAP is suitable only for the elderly. In fact, QDAP is suitable for different age groups and are highly flexible. From the age of 18 to 50 or to the elderly currently enjoying retirement, you can purchase QDAP by paying premium monthly or even annually. Consumers are also able choose different currencies, including USD and HKD, for their policies. Furthermore, premiums can be converted to tax-deductible amounts, and may enjoy various special offers provided by insurance providers.
As long as you purchase QDAP through a trustworthy insurance company and a professional insurance agent, you will be able to enjoy long-term and stable financial returns. In addition, this may help you to add value to your wealth so that you will be better prepared for retirement.
Want to learn more about the government’s VHIS? Read our VHIS Guide!