Hongkongers’ interest in annuity products is apparent, according to findings in the Schroders Hong Kong Retirement Research. From interviews with 700 people who were approaching retirement or already in retirement, 19% were either very interested or quite interested in annuities as an investment option. When asked specifically on interest towards the life annuity scheme proposed by the government-owned Hong Kong Mortgage Corporation (HKMC), 30% were either very interested or quite interested. Furthermore, 52% of respondents were either very interested or quite interested in insurance savings plans, many of which have annuity like mechanism built-in.
Lesley-Ann Morgan, Global Head of Defined Contribution and Retirement, said: “Hong Kong people have quite a high interest in annuity compared to many other places around the world. That could be because the initial proposed rates of the HKMC annuity scheme looks attractive, possibly more attractive than other similar types of annuities in the market today in a sense that it covers across the life time. From our retirement research, we also saw another 34% of people who said they were ‘neutral’ on the HKMC scheme, which we interpret as them waiting for more information about this programme. We are glad with this direction of travel as we believe annuity should play a role in retirement financial planning.”
Overall, participants of the Schroders research target to save an average of HK$2 million for retirement, and on average expect to spend HK$12,800 per month when they have stopped working.
Chris Durack, CEO of Hong Kong and Head of Institutional Business, Asia Pacific, said: “With Hong Kong men expected to live to an average of 81 years and women to 87 years1, if one is to retire at the age of 65, HK$2 million retirement reserve will be drawn down in roughly 16 years, that’s even if they manage to get annual returns on their reserve in the order of 4% to 5% per annum. This is clearly not sufficient. They would have to either save more before retiring or tighten their belts during retirement to try to stretch their savings for as long as possible. This is why it is crucial to plan and invest for retirement as early as possible. In fact, our research showed that those who had a clear financial plan for retirement actually started saving at a younger age than those who were less prepared.”
Chris Durack continued: “Aside from MPF, our research showed that amongst those approaching retirement, the ones who had a plan started thinking about retirement at age 43; while those who did not only started thinking at age 59. Overall, people who had a proper plan in place were actually saving twice the amount of those who did not have a plan. As such, the benefits of early retirement planning are clear – more time for the market to work to your advantage, more time to structure your investments, and more time to make contributions.”
When asked what their expected investment return and asset allocations were to achieve their retirement reserves, people on average expect around 11% return over a three-year period but on average allocate near 40% of their assets in cash and time deposits.
Lesley-Ann Morgan said: “People need to understand that with the current savings rates and significant changes in the return environment, a cash-heavy retirement investment plan is unlikely going to generate sufficient income during retirement. In particular, people need to think more about healthcare and not just when they need it. Healthcare costs go up with inflation, if not quicker, and they need assets that can generate returns above inflation at the least. Cash is not going to do that.”
Lesley-Ann Morgan continued: “We believe if a portion of an individual’s retirement savings is put into a government-backed annuity scheme such as the one proposed by HKMC, the remainder should be invested in suitable growth assets. The best strategy is not to completely de-risk at retirement. Investing via a diversified approach offers the ‘Goldilocks’ of investment trade-offs: neither too much risk nor too little return. This should help to generate the income and returns that Hong Kong retirees need and want.”
The Schroders retirement research also showed that about 80% of the people rely on relatives and friends for recommendations, and only 54% would seek advice from bank relationship managers or financial advisors. This poses the risk of exposing themselves to a mix of information that may not be professional advice, and leaves them vulnerable to having their individual character traits influence their ability to make rational investment decisions.
As such, Schroders encourages people of Hong Kong to take the Schroders investIQ2 test, an online platform that combines behavioural finance and investment education to help them make better, more informed investment decisions.
Chris Durack concluded: “Schroders investIQ can help people identify whether they are a patient planner or more emotional investor. We understand that people could come with their own ideas, perceptions and biases when it comes to investing. This tool would help them understand what type of behavioural characteristics they might be prying to, representing or thinking. They can use this information to think deeper what they should be doing in retirement planning.”
1 2017 global life expectancy ranking, Ministry of Health, Labour and Welfare, Japan.
2 http://www.schroders.com/en/hk/retail-investors/education/investiq/
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