What is available?
A reader sent me this article about an annuity product on Monday and asked for my reaction.
I’m not too familiar with the annuity market here in Japan, so I thought this might be a good chance to take a look at what an annuity is, how to think about them, and of course to discuss the specific product our reader was asking about.
What is an annuity?
An annuity is a form of insurance against living too long. It’s a promise to pay you a certain amount of money until you die.
A state pension is a type of annuity (maybe one of the best types, as it is guaranteed by a government and not a private company). This is why paying into the Japanese national pension or the UK pension can be a good idea.
You generally buy an annuity by paying a certain amount of money in exchange for regular payments. If you don’t live very long, you lose out as you won’t claim as much money as you paid. If you live for a long time, however, you can receive more money than you paid and most importantly you never run out of money.
What types of annuity are there?
There are many types. Typical variations include whether the annuity increases with inflation or not, whether your spouse can continue receiving it if you die first, and when the payments start. These factors make the annuity more or less expensive.
How should we think about annuities?
An annuity can be used to establish an income floor for your retirement. Together with any pensions, annuities can provide a minimum income that will hopefully meet your basic needs. This post explains the concept very well.
Another advantage of annuities is that they are a form of dementia insurance. It is quite possible that we will become unable to look after our investments in old age, becoming vulnerable to mistakes in judgement or fraud. An annuity can eliminate this risk by providing you a regular income regardless of what you do.
How about the product in the article?
The article describes a whole life annuity offered by Sumitomo Mitsui Banking Corp. The example given is a person who buys the annuity at age 60, then begins to receive payments in US dollars at age 70. The product yields 3%, so to break even the customer would have to live to 83 or 84 years old.
To make it sound more attractive, the article compares this to just keeping savings in cash and taking out a certain amount every month. I don’t believe this is a very useful comparison.
There are several problems with the product as written:
- It is denominated in US dollars, exposing the customer to exchange rate risk (if the yen gets stronger the payments will be worth less). Annuities are supposed to provide reliable income so this is not ideal.
- The payments start ten years after handing over the cash. Some people will die before receiving a penny, and their families will lose out. Also, given historical rates of return you could expect a balanced stock portfolio to double over ten years.
- The 3% yield is at the lower end of safe withdrawal rates (the amount you should be able to take out of a stock/bond portfolio without running out of money). Even keeping your money in cash and taking out 3% a year would give you 33 years of payments so again this does not seem particularly attractive.
I think there can be a place for annuities in retirement planning, but this product does not seem fit for purpose. Anyone who is willing to learn a bit about investing should be able to do better by investing in a simple portfolio, particularly if they use their iDeCo and NISA allowances.
What do you think? Are there any other examples of annuities in Japan? Anything worth looking at?
As you noted, the biggest downside to an annuity, of course, is that the money invested dies with you, so to speak. If it’s simply invested in mutual funds, the funds are still part of your estate when you die.
I guess the only scenario I can come up with off the top of my head is someone that can’t get life insurance due to existing medical issues?
Yeah, fo us we’ll have Japanese state pensions plus hopefully my UK pension as an income floor, then say 2% in dividends from the portfolio plus any capital growth. Can’t see us needing annuities, especially if they are going to be 3% paying out in dollars ten years later!
I am slightly worried about dementia/becoming incapable of managing stuff, but hopefully that is a while away and I should have trained Alyssa to handle my portfolio by then…
When you hit your U.K. state pension age and claim it, will either your U.K. or Japan pension be reduced? I retired with a U.K. public sector pension recently but do not yet qualify for a U.K. state pension. When I am old enough to qualify for a U.K. state pension and claim it, my public sector pension will be reduced!
I don’t believe there is any relationship between the UK and the Japanese state pensions, so am expecting to receive both in full.
Would be very interested in hearing that I’m wrong though!
I don’t know much about annuity products in Japan, but the average life expectancy in Japan is 80 years old for a male, 87 years old for a female. So, the company would not lose money if they have a lot of male customers.
I think you could buy an annuity, if your family members tend to live long. Many fatal diseases, like cancer, are genetic. So if your family and relatives live until 100, then the annuity will be worth!
Oh, I’m sure the insurance company has done the numbers so it works for them… not sure it works for the customers though!
The insurance premium is processed statistically. So, if an individual has a significant deviation from the average, he/she can profit. There are always some people who die very young / live very long / get sick a lot, they benefit from the insurance products, because the products assume that you are an average person.
Last year I accompanied my wife back to Japan to visit the PIL’s. My wife visited the pension office in her home city and applied to claim her state pension. When completing the document she was asked if was in reception of any other pension. As she is not in receipt of a U.K. pension she answered “no”. There was no information as to wether or not the receipt of an overseas pension would affect her Japanese state pension, but there must be a reason why they ask.
Interesting. Could be for tax purposes I guess.
I don’t think it that Q was asked for tax reasons, as my wife lives in the U.K. and pays no tax in Japan on her Japan state pension. In order to progress her claim she had to get a letter from the Japan Embassy in London to prove that she lives here and not in Japan. Only then would the pension office in Japan process her claim.
Japan has agreements with several countries about social security pensions. The time spent working in both countries may be combined to make you eligible for a pension in either country (I don’t know about both). The US will accept time worked in Japan, as long as you have paid into the J system, when calculating your US pension amount.
I have not done this yet. When my husband was going through his retirement procedure, we did talk to the J pension office about his time worked overseas. The J system will accept the time he worked in the US and elsewhere when determining his pension. But he has to file the paperwork first.
What needs to be understood with these cross country agreements though is that it doesn’t mean you get full pensions from both countries. You get to claim the full benefit, pro-rated to the number of years you’ve worked in each country.
In my case, I’ve contributed 1 year in France to social security (out of the 40 I’m supposed to). If I work 39 years in Japan, I now qualify for “full” French Social Security and “full Japan” social security.
I’d get 1/40th of French Social security, and, I assume, 39/40th of Japanese social security.
I’m pretty sure that is not how it works. The Japan pension office explained it to me in detail. (Note: for Canada/Japan) The years I worked in Canada count as years worked contributing to a Public Pension but they would only calculate the amount of my Japanese pension based on my years working in Japan. I would receive only one pension Japan OR Canada depending on where I lived during retirement. I believe the agreements are so people do not get stuck between two countries but also to cut down on countries paying pensions to non-residents. I’d be surprised if France would pay you 1/40th of a pension, I think rather they would give you a form to say you contributed for one year and assume you are getting a Japanese pension. I’m pretty sceptical of all the info as I really had to dig and dig and the staff in both Japan and Canada seemed pretty clueless on these matters.
It depends on the treaty. The UK-Japan pension treaty just says people won’t be forced to pay both, there is no transfer of eligibility etc.
I believe the US-Japan one is much more comprehensive: http://www.nenkin.go.jp/international/english/international/notesus.html
However UK nationals can still pay into the UK state pension on a voluntary basis: http://www.retirejapan.info/blog/uk-state-pensions-4
It sounds like it’s not a great deal if you have cash. However, my in-laws got an annuity based on their home value. They can continue to live in the home, which is what they wanted, and get the benefit they would have had it they had sold the house and had the cash. It seems to me that this is working out for them. It’s not even apparently true that they must forfeit the entire house either when they die, as a friend told me that her parent had such an arrangement and she was able to sell the house and pay off the money that had been forwarded to them. So maybe it can’t be considered an annuity at all, but it is guaranteed to keep them in their house until they die.
That sounds more like a reverse mortgage (except they normally pay you a fixed amount): https://en.wikipedia.org/wiki/Reverse_mortgage
Here’s one example from a Japanese bank: http://www.smbc.co.jp/kojin/reverse-mortgage/
Yes, that sounds very much like a reverse mortgage, which might be one of the worst financial products on the market. Interest *accrues* over the life of the loan, which means the debt could end up being larger than the value of the house, *especially* if the value of the house declines (which it is very likely to do in Japan).
It’s borrowing money to get money, and that money -has- to be repaid, either when the home is sold or the owner passes, and the monthly income is lowering the owner’s equity in the home.
So how much do I get per month according to that plan when I am 70 , when I pay for example 10 Million Yen at the age of 60.
it’s not very clear, is it? You’d probably have to get an official quote to be 100% sure.
The article stems to imply that 35 million yen will get you 120,000 yen a month. Of course, that is based on the current exchange rate, and I read something recently that said the yen is 20% devalued…