Main Types and Features of Annuities
Generally, annuities can be categorised based on when annuity payments commence and how long income payments continue. These factors give rise to four key components: immediate vs. deferred and lifetime vs. fixed-term annuities.
1. When Does Annuity Income Begin: An immediate annuity starts paying income shortly after a lump‑sum premium is paid and is therefore commonly chosen by retirees. A deferred annuity, on the other hand, allows individuals to make a lump‑sum or instalment contribution earlier in life, with annuity income beginning at a specified future date or age.
Type of Annuity |
Payment and Premium Arrangement |
Payout / Income Structure |
Suitable For |
Advantages |
Considerations |
Immediate Annuity |
Premium paid in a lump sum |
No accumulation period; income begins soon after premium payment, with fixed monthly or periodic payouts |
Individuals nearing or entering retirement with a lump-sum reserve |
Provides immediate, stable cash flow to cover retirement expenses |
Requires a sizeable upfront premium; limited flexibility once payouts are fixed |
Deferred Annuity |
Premium can be paid in lump sum or by installments; includes a contribution and accumulation period |
Accumulates interest and reinvestment gains during the accumulation phase; payments start at a pre-agreed age or date. Eligible products may offer tax deductions |
Working individuals who wish to build retirement reserves and enjoy tax incentives |
With a longer accumulation period, annuity income is typically higher under the same total premium; some plans qualify for tax deduction |
Income begins only after the accumulation phase, meaning a longer lock-in period. Early withdrawal may result in losses |
2. Annuity Income Period: This refers to how long annuity income is paid and can be divided into Life Annuities and Term Annuities. A life annuity provides income for as long as the policyholder lives, although some insurers define “lifetime” up until 100 years of age. A term annuity pays income over a predetermined period, such as 10 or 20 years.
Type of Annuity |
Payment and Premium Arrangement |
Payout / Income Structure |
Suitable For |
Advantages |
Considerations |
Lifetime Annuity |
Can be immediate or deferred; premium paid as a lump sum or by installments depending on product design |
Provides a steady stream of income throughout the policyholder's lifetime, until death |
Individuals concerned about longevity risk who want sustained income in later life |
Helps mitigate the risk of outliving one's savings, providing greater income security during retirement |
Generally involves higher premiums; shorter lifespans may reduce total payout period |
Fixed-Term Annuity |
Can be immediate or deferred; payouts made over a defined period |
Pays regular income during a specified term (e.g. 10 or 20 years); payments stop after the term ends |
Individuals with specific financial goals, such as bridging income gaps in early retirement or boosting cash flow temporarily |
Under the same total premium, annuity income is paid during a fixed payout period and stops upon maturity, which typically results in higher annuity income and offers more flexible payout term options. |
Income stops after the term ends; additional long‑term retirement funding may be required |
Retiring soon? Immediate annuities can start providing you income right away:
If you would like to receive retirement income "right after you buy", an immediate annuity may be worth considering. Its role is to help those who are about to retire, or have just retired, quickly establish a stable and predictable income stream, thereby reducing financial uncertainty in the early years of retirement.
In general, you pay a single premium to the insurance company and can then start receiving regular annuity payments within a short period of time (usually within one month to one year).
Immediate annuities example:
Mr. Lee, aged 50 (age next birthday), enrols in a PRUretirement early income plan with a single premium. After allowing the funds to accumulate within the plan for one year, he retires at age 51 and enjoys 20 years of stable monthly income to support his retirement life.
Several years to go before retirement? Deferred annuities help you prepare for the future:If there is still some time before you retire, a deferred annuity is generally more suitable. This type of annuity can be viewed as a long‑term arrangement that allows your funds to grow gradually during the accumulation period.
During this waiting period, your money stays in the "accumulation phase", giving it the opportunity to grow over time, and the related returns are generally entitled to tax deferral treatment. You may choose to make a single lump‑sum contribution or pay premiums by instalments, allowing your funds to build up over time to support your future retirement income goals.
Deferred annuities example:
Sam is a non‑smoker and works as an accountant. At the age of 46 (age next birthday), he enrols in the PRURetirement Deferred Annuity Plan and chooses to pay premiums annually for five years, allowing the funds to accumulate within the plan over that period. When he takes an early retirement at age 51 (age next birthday), he will be able to enjoy 20 years of monthly annuity payments.
The plan is also a Qualifying Deferred Annuity Policy (QDAP) recognised by the Insurance Authority, allowing eligible premiums to enjoy tax deductions and supporting Sam’s long term retirement and tax planning, while helping cover daily living expenses for him and his wife, Hazel, after retirement.
How is the annuity tax deduction cap calculated?
Qualifying Deferred Annuity Policy are one of the so‑called "tax deduction trio" and share a common tax‑deduction cap with tax‑deductible MPF voluntary contributions (TVC). For a Qualifying Deferred Annuity Policy (QDAP), eligible premiums are tax‑deductible, subject to a maximum deduction of HK$60,000 per taxpayer per year^.
The cap is calculated "per Hong Kong taxpayer". If both you and your spouse are chargeable to tax and each of you owns a qualifying deferred annuity policy, then each of you may enjoy tax deductions of up to HK$60,000 in principle, depending on the actual premium paid and your tax‑filing arrangements.
QDAP Tax Deduction Example
As Hong Kong taxpayers, Gary and his wife Ida may enjoy tax deductions each year during Gary's premium payment period in respect of the qualifying premiums paid under his plan, up to HK$60,000 per person per year. Assuming their tax rate is 17%, each of them could save up to HK$10,200^ in tax annually, meaning a total potential tax saving of HK$20,400 per year for the couple*. However, the actual amount depends on individual circumstances.
Before you decide: estimate your potential tax savings
When considering a Qualifying Deferred Annuity Policy (QDAP), you may first use Prudential's tax calculator to get an initial estimate of the tax deduction you might enjoy at different premium levels. By entering your basic income and personal details, the tool helps you understand how annuity premiums may affect your payable tax for the current assessment year, serving as a useful reference.
