Annuities 年金
An annuity is a contract under which an insurer receives a single premium or a series of premiums and then makes regular payments to the annuitant as agreed. Life insurance mainly protects against the financial loss caused by dying too early, whereas a life annuity protects against the risk of living too long, so the two work in broadly opposite ways. Under a life annuity, amounts not drawn by those who die earlier help to support payments to those who live longer.
Annuities can be classified in four ways. (1) When payments start: an immediate annuity starts paying soon after purchase, while a deferred annuity starts only after a deferment period. (2) How premiums are paid: by single or periodic premium, with immediate annuities usually bought by single premium. (3) How long payments last: a life annuity pays until the annuitant dies; a temporary life annuity pays until the end of an agreed term or the annuitant's death, whichever comes first; and an annuity certain pays for an agreed period whether or not the annuitant is alive. (4) How many lives are involved: a joint and last survivor annuity pays until the death of the last survivor.
Some life annuities include protection against the annuitant dying early. A guaranteed period annuity must pay throughout an agreed period, and if the annuitant dies during that period the remaining payments go to a beneficiary. A refund annuity returns the difference between the purchase price and the annuity payments already received. These features reduce the income that the same purchase price can buy.
Anti-selection in annuities runs in the opposite direction from life insurance, because people who expect to live long are more inclined to buy. Insurers therefore do not normally ask annuity applicants for evidence of health, and they price using mortality tables that assume longer lives. In Hong Kong, annuities fall within Class A, Life and Annuity, of long term business. A Qualifying Deferred Annuity Policy must be certified by the Insurance Authority. The main conditions include total premiums of at least HK$180,000, a premium payment period and a deferment period of at least 5 years each, annuity payments starting when the annuitant is 50 or over, and an annuity period of at least 10 years. The policyholder can claim a tax deduction for premiums paid, up to HK$60,000 per year of assessment in aggregate with MPF tax deductible voluntary contributions.
Pensions 退休金
A pension is an arrangement that provides income or money to members after retirement, usually funded by employer and/or employee contributions. A defined benefit scheme calculates benefits by a set formula, normally linked to salary and years of service, and the employer mainly bears the risk of a funding shortfall. Under a defined contribution scheme, benefits depend on accumulated contributions and investment returns, so the member bears the investment risk. Insurers can take part in this market through the retirement scheme management classes of long term business (Classes G, H and I).
Hong Kong has two main ordinances. The Occupational Retirement Schemes Ordinance (Cap. 426) regulates schemes that employers voluntarily set up for employees. These schemes must be registered or exempted, can be defined benefit or defined contribution, and can be set up through insurance arrangements. The Mandatory Provident Fund Schemes Ordinance (Cap. 485) established the MPF System, which started on 1 December 2000 and is a trust-based defined contribution system. The Mandatory Provident Fund Schemes Authority administers both, and an occupational retirement scheme meeting the conditions can apply for MPF exemption.
Unless exempt, employees and self-employed persons aged 18 to under 65 must join an MPF scheme. The employer and employee each contribute 5% of the employee's relevant income. For an employee earning more than HK$30,000 a month, each side's mandatory contribution is capped at HK$1,500 a month. An employee earning less than HK$7,100 a month need not make a mandatory contribution, but the employer must still contribute 5%. Self-employed persons also contribute 5%, subject to corresponding income limits. Exempt persons include domestic employees, self-employed hawkers and people covered by statutory pension schemes, such as civil servants.
Mandatory contributions vest fully in the member as soon as they are paid. Except in specified circumstances, accrued benefits must be preserved until age 65, and changing jobs is not a ground for withdrawal. The specified circumstances are early retirement at 60, permanent departure from Hong Kong, total incapacity, terminal illness, a small balance and death. On retirement, a member can use withdrawn money to buy an annuity, turning a lump sum into regular income.
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