Are ILPs Good for Retirement? What an ILP Can and Cannot Do for Your Income

Last Updated on July 15, 2026 by Tree of Wealth

If you’re within ten years of retirement, you’ve probably been shown an investment-linked policy as part of the plan — or you’re holding one and wondering what role it’s supposed to play once the salary stops.

We’ve already covered the product-level debate — fees, structures, and whether ILPs are worth buying at all — in our guide on whether ILPs are good or bad. This article answers a narrower and, for anyone approaching retirement, more important question: can an ILP actually pay you a retirement income — and should it?

Because here’s what gets lost in the usual ILP debate: growing money and drawing income are two different jobs. A product can be perfectly reasonable for one and poorly suited for the other. Judging an ILP as a retirement tool means judging it against the specific demands of retirement — monthly cashflow that arrives whether markets cooperate or not, money that lasts as long as you do, and a plan that survives a bad market in your first years of retirement.

That’s what this guide covers: where an ILP fits in a properly layered retirement plan, how its payout mechanics actually work, a retirement risk most people have never heard of, and when a guaranteed instrument does the income job better.

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Growing Money and Drawing Income Are Two Different Jobs

Most retirement planning mistakes trace back to one confusion: treating the portfolio that builds your wealth and the system that pays your retirement as if they were the same thing.

They’re not — because the job changes the day the salary stops.

The accumulation years: volatility works for you

While you’re working, your investments have three advantages. Time — a bad year can be recovered over the next decade. Income — your salary covers daily life, so the portfolio is never forced to sell anything. And direction — every month you’re a buyer, which means market dips actually work in your favour: the same monthly amount buys more units when prices fall.

This is why market-linked vehicles — ILPs included — are well suited to the accumulation phase. For someone investing every month with fifteen years ahead, market dips simply mean buying at lower prices.

The income years: the same volatility turns against you

Retire, and all three advantages disappear at once.

You’re no longer a buyer — you’re a seller, every single month. There is no salary standing between your living expenses and your portfolio. And time stops being your ally, because the money you withdraw in a downturn is permanently gone; it never participates in the recovery.

The demands change accordingly. What you now need is cashflow that arrives regardless of what markets are doing, money that lasts as long as you do — not just as long as a projection said it would — and enough stability that a bad first few years of retirement doesn’t force you to sell your way through a downturn.

Notice that none of those demands is “maximum growth.” A retiree’s real concerns are running out of money, being forced to sell at the wrong time, and outliving the plan.

Why this matters for the ILP question

An ILP is a market-linked accumulation vehicle. Every mechanism inside it — unit values, fund performance, monthly investing — is built for the first job. Nothing in a standard ILP guarantees the second: there’s no promise your money lasts for life, no payout that arrives regardless of markets, no protection against selling through a downturn.

That’s not a hidden flaw — it’s simply the kind of instrument an ILP is, and it cuts both ways. Criticising an ILP for lacking guaranteed lifetime income is like criticising a term plan for having no cash value: it was never that instrument’s job. But relying on an ILP as your primary retirement income, as if market-linked value were the same thing as dependable cashflow, is where retirement plans often run into trouble.

So the real question isn’t whether an ILP is good for retirement in the abstract. It’s what job you’re giving it — which is what the next section’s framework sorts out.

The Four Layers of a Retirement Plan — and Where an ILP Belongs

Once you separate the two jobs, retirement planning stops being a product debate and becomes a matter of matching each instrument to the right job. A useful way to organise this is in four layers, each answering a different question.

Layer 1: The income floor — “Will my essentials always be paid?”

This is the money that covers non-negotiables — food, utilities, insurance premiums, transport — for as long as you live, no matter what markets do. It has to be guaranteed and it has to be lifelong.

For most Singaporeans, this layer is CPF LIFE, topped up to the retirement sum that produces a payout matching your essential expenses. Private lifetime annuities can extend the floor if CPF LIFE alone doesn’t reach it. Nothing market-linked belongs here — by definition, the floor cannot be allowed to have a bad year.

Layer 2: Liquidity — “Can I handle a surprise without wrecking the plan?”

Cash, fixed deposits, Singapore Savings Bonds — one to three years of expenses that can be tapped immediately. This layer also quietly protects Layer 3: when markets fall, you spend from here instead of being forced to sell investments at depressed prices. Without this buffer, every market downturn becomes an income problem.

Layer 3: Growth — “Will my money keep pace with the next 25 years?”

A 65-year-old retiring today has to plan for a retirement that may run 25 or 30 years — long enough for inflation to roughly halve the purchasing power of money left idle. So part of the portfolio must stay invested and keep growing through retirement, funding the later decades and topping up Layer 2 in good years.

This is where an ILP belongs. Alongside unit trusts, ETFs and diversified portfolios, an ILP is a Layer 3 instrument: market-linked, growth-oriented, non-guaranteed. Held here — on top of a secured floor and a liquidity buffer — its volatility is manageable, because your monthly essentials never depend on its unit price. Some ILPs also offer payout features that can distribute income from this layer, which we’ll look at in the next section.

Layer 4: Protection and legacy — “What happens if health or life goes wrong?”

Hospitalisation coverage, critical illness protection, long-term care supplements, and whatever you intend to leave behind. Retirement plans are derailed more often by uninsured health events than by bad markets — a single stroke can consume in two years what took twenty to save. An ILP with meaningful life coverage contributes something here, though most modern ILPs, with their minimal insurance element, do not.

The mistake the layers reveal

When a retirement plan runs into trouble, it’s often for the same reason: a product doing a job it was never built for. An ILP asked to be the income floor. A retiree fully in cash, with no Layer 3, slowly losing to inflation. No Layer 2, so every downturn forces selling at the worst time.

An ILP judged as a whole retirement plan will always look inadequate — because no single instrument passes that test. Judged as a Layer 3 instrument sitting on a properly built floor, it competes on fair terms with every other growth vehicle.

Which raises the practical question this article exists to answer: when an ILP is your Layer 3, how does it actually pay you?

How an ILP Actually Pays You in Retirement

Saying “my ILP will fund my retirement” leaves out the most important part: how. An ILP doesn’t pay retirement income by default — it holds a pot of units. Turning that pot into monthly money happens through one of three mechanisms, and they behave very differently.

Option 1: The dividend payout feature

Some ILPs — mostly the modern accumulation generation, such as FWD Invest Flexi VII — offer a payout option: switch your holdings into dividend-paying sub-funds, and the distributions get paid to your bank account instead of being reinvested.This is the feature that makes ILPs look ready-made for retirement, and used properly, it’s the most sustainable of the three mechanisms.

But it’s worth understanding what a fund distribution actually is. It is not interest, and it is not guaranteed. Distribution rates can be cut when market conditions turn. More importantly, some funds maintain their payout in weak years by distributing out of capital — paying you with your own units. The headline yield stays intact while the pot quietly shrinks. Nothing improper is happening; it’s disclosed in the fund documents. But a retiree who reads a steady payout as proof the plan is “working” can be drawing down capital for years without realising it.

The habit to build: track your unit balance and fund value, not just the arrival of the monthly payout. The payout arriving each month doesn’t tell you whether the underlying value is holding up — only the balance does.

Option 2: Partial withdrawals

Past the lock-in period, most ILPs allow partial withdrawals — you instruct the insurer to sell units and send you the proceeds, as and when needed. Maximum flexibility: withdraw more one year, less the next, nothing at all in a bad market.

The flexibility is also the risk. Every withdrawal is a unit sale at that day’s price, which makes when you withdraw as important as how much — a problem big enough that it gets the whole next section. Two practical checks before relying on this route: whether your plan imposes minimum holding balances or withdrawal charges, and whether withdrawals affect any loyalty bonuses still vesting. Both vary by plan, and both are worth confirming in writing before you retire, not after.

Option 3: Full surrender and redeploy

The third route treats the ILP purely as an accumulation vehicle: at retirement, surrender the policy entirely and move the proceeds into instruments built for the income job — an annuity or retirement income plan for the floor, cash and bonds for the buffer, a simpler portfolio for growth.

For some policies, this is the cleanest answer. If your ILP has passed its surrender-penalty years and its charges no longer justify keeping the structure, converting a grown pot into purpose-built income instruments is a legitimate — sometimes the best — endgame. The checks before doing it: where you sit on the surrender schedule, any insurance coverage you’d lose that can’t be replaced at your age and health, and what the redeployed money must earn to beat simply staying put.

The question that decides between them

Three mechanisms, one underlying question: how much of your retirement depends on this policy behaving well?

If the ILP is supplementary income on top of a secured floor — Layer 3 doing Layer 3’s job — the dividend option or ad-hoc withdrawals can serve you for decades. If you’re discovering that the ILP effectively is the retirement plan, no payout mechanism fixes that; the money needs restructuring into layers before the salary stops, and the earlier that conversation happens, the more options you have.

And all three mechanisms share one exposure that deserves its own section: what happens when the market falls in your first years of drawing income.

Sequence of Returns: The Retirement Risk Most People Have Never Heard Of

Ask most people what makes a retirement portfolio succeed and they’ll say returns — earn a good average and the plan works. For a retiree drawing income, that’s only half the picture. Two retirees can earn the exact same average return and end up in completely different financial positions — purely because of the order in which the good and bad years arrived.

This is sequence-of-returns risk, and it’s the single most important concept for anyone planning to draw income from a market-linked policy.

Why order suddenly matters

During accumulation, order is irrelevant — you’re not selling, so a downturn in year 2 or year 12 works out the same by the end. The moment you start withdrawing, that symmetry breaks. A withdrawal made during a downturn sells more units at depressed prices, and those units are gone for good — they never participate in the recovery. Early losses get locked in by every payout, so the portfolio recovers from a smaller base while the withdrawals keep coming.

Bad years early in retirement do lasting damage. The same bad years late in retirement barely matter.

The same returns, in reverse

An illustration. Two retirees each start with S$500,000 and withdraw S$25,000 a year for ten years. Their portfolios experience identical annual returns — averaging 4.2% — just in opposite order. Retiree A gets the bad years first: −15% and −8% in years one and two, with the strong years at the end. Retiree B gets the same sequence reversed: strong years first, the downturn at the end.

After ten years, Retiree B has roughly S$474,000 left. Retiree A has roughly S$343,000 — over S$130,000 less, from the same returns and the same withdrawals. The only difference was timing, which neither of them chose.

(Illustrative figures only — hypothetical returns, fees excluded, withdrawals taken at the start of each year. Real outcomes vary; the mechanism doesn’t.)

Now consider when people actually retire and start drawing income: whenever they turn 62 or 65 — a date set by their birth year, not by market conditions. Whether your first five years of retirement land in a bull run or a weak decade is pure luck. Sequence risk is, quite literally, a lottery on your retirement start date.

What this means for an ILP paying you income

Everything in the previous section now comes into focus. Partial withdrawals taken through a downturn are exactly the early-loss problem described above. Dividend payouts maintained from capital during weak markets are the same problem in a less obvious form. An ILP — or any market-linked portfolio — used as primary income with no buffer is fully exposed to a risk that never shows up in a benefit illustration, because illustrations assume smooth returns, and real markets don’t move smoothly.

The defences

Sequence risk can’t be eliminated, but it can be managed well. The good news: every defence is about structure, not about predicting markets.

Cover your essentials with guaranteed income. If CPF LIFE and any annuity payouts already cover your essential expenses, a fall in your ILP’s value doesn’t threaten your day-to-day living. This is the most important defence of all.

Keep a cash buffer. Two to three years of expenses in cash, fixed deposits or Singapore Savings Bonds means that when markets fall, you can pause ILP withdrawals and spend from the buffer instead — no units sold at low prices. Top it back up when markets recover.

Stay flexible with withdrawals. If you can spend a little less in bad years and a little more in good ones, your portfolio will last significantly longer than if you withdraw a fixed amount no matter what.

Reduce risk near your retirement date. The five years before and after retirement matter most. Shifting part of the portfolio into lower-volatility funds as you approach that window — most ILPs allow free fund switching — softens the impact of a bad year right at the start.

None of this requires predicting markets. It just needs to be set up before the salary stops — which makes the few years before retirement the right time to get the structure sorted out.

So an ILP can play the growth role and even pay you income from it, as long as the structure around it can absorb the sequence risk. The remaining question is whether an ILP is the best instrument for that job compared with the alternatives built specifically for retirement income.

ILP vs Annuity vs Retirement Income Plans: Choosing Instruments for the Income Years

By now the framework is set: the floor must be guaranteed, the growth layer can be market-linked, and sequence risk is managed by structure. The last question is instrument selection — when you’re converting accumulated wealth into retirement income, what does each tool actually offer? Here’s how they compare.

The three private instruments

Lifetime annuities. You hand the insurer a lump sum; it pays you a guaranteed income for as long as you live. This is the only private instrument that genuinely removes both market risk and longevity risk — the payout arrives in a downturn, and it arrives at age 99. The price of that certainty is steep: the capital is largely locked, the implied return is modest, inflation erodes a level payout over 25 years, and legacy value is limited. In Singapore, CPF LIFE already occupies this role at better value than any private annuity — so a private lifetime annuity earns its place only when your CPF LIFE payout still falls short of your essential expenses.

Retirement income plans. The endowment-style products most insurers offer for retirement: pay premiums over a set period, then receive payouts for a defined stretch — ten or twenty years, or to a set age. Typically a guaranteed portion plus a non-guaranteed bonus component. They sit in the middle of everything: more certain than an ILP, less than an annuity; some growth participation, less than markets; defined payouts, but not lifelong — which means they answer cashflow, not longevity. Useful as a bridge (for instance, funding the years between an early retirement and the start of CPF LIFE payouts) rather than as the floor itself.

An ILP drawing income. Everything from the previous two sections: full market participation and the best long-run growth potential of the three, complete flexibility in how much and when you draw, meaningful legacy value if markets have been kind — and zero guarantees, full sequence-risk exposure, income that depends on fund performance rather than a promise.

Side by side

Notice that each instrument is strong exactly where the others are weak. The annuity’s certainty comes at the cost of growth and flexibility; the ILP’s growth and flexibility come at the cost of certainty. No column wins every row — which is why “which one is best” is the wrong question. A proper retirement plan usually needs more than one of them, each doing the job it’s built for.

The realistic shape of a good plan

For most Singaporean retirees, the roles fall out naturally. CPF LIFE — topped up properly — as the floor, extended by a private annuity only if essentials still aren’t covered. A retirement income plan where there’s a defined gap to bridge. And the growth layer in market-linked instruments — an ILP among the candidates — drawing flexible income on top of a floor that stays steady no matter what markets do.

Whether an ILP is the right candidate for your growth layer comes back to the territory of our first guide: its charges versus direct alternatives, where you sit on the surrender schedule, and features like payout options that direct portfolios don’t replicate. An ILP you already own, past its penalty years, with a good range of funds, is often worth keeping for exactly this job. Taking up a new ILP close to retirement needs a stronger justification — the charge structures and lock-in periods are designed for longer horizons — so the fit has to be assessed carefully against your timeline.

The Verdict: Are ILPs Good for Retirement?

So, after everything — here’s the answer, plainly.

An ILP can be a good growth instrument for retirement — but it should never be the foundation. Used for what it’s built for — growing wealth through a long retirement and paying out flexible income on top of a secured floor — a well-structured ILP holds its own against any market-linked alternative, and its payout options and legacy value are genuine advantages. But if your essential expenses depend on it, the plan is broken — not because the ILP is a bad product, but because no market-linked instrument can do a guaranteed instrument’s job.

So if you’re holding an ILP as retirement approaches, the question is never “keep or panic.” It’s whether every part of your money is doing the right job: secure the income floor first through CPF LIFE and, where needed, guaranteed instruments; build the cash buffer that lets your ILP ride out bad markets untouched; then let the ILP do the growth job it’s actually built for. And if you’re comparing ILPs closer to retirement, two questions will tell you a lot — what job would the plan do that your existing layers don’t, and what do the charges look like against your actual time horizon? A good adviser will answer both clearly, in writing.

In the end, product debates are a distraction. Retirements don’t fail because someone chose an ILP over an ETF. They fail because nobody checked whether the floor was secured, the buffer existed, and each instrument was doing a job it could actually perform. That check can be done in an afternoon.

This article is for general information only and does not constitute financial advice; speak to a licensed financial adviser before making any decision.

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