Annuity. Value or not?

caveat_emptor

A 65 year old male can draw a single life annuity of £7391 for £100,000 and expect to live for another 16 years. At the current gilt yield of 5% the annuity provider would have £34,000 of the annuitants cash when he died (exluding costs of administration). This doen't seem like good value for the annuitant. Or am I missing something?

Cav

dunstonh

You are forgetting cost of setup, profit, recovering the overpayment of annuities in the 80s/90s along with guaranteed annuities.

Yield will not be the only consideration as there would need to be some protection for capital loss.

Assuming compulsary purchase annuity and Non smoker, you can get £7483 on 100k. Probably a little more with a bit more research. A purchased life annuity would be a little more.

caveat_emptor

Thanks for the reply but I did say that amount remaining after statistical age at death excluded admin costs. Would have thought that overpayment of those surviving the stats would be balanced by early deaths.
Not sure about capital loss as I thought that gilts were paid in full on maturity.
Even with factors mentioned it still looks a good deal for the provider, which is not surprising.

dunstonh

Gilts only return capital if you bought them at the original issue price of a 100 and you hold them until maturity. In between that point gilts can be traded and can have a lower or higher price depending on the demand. The demand is affected by interest rates.

Milarky

A 65 year old male can draw a single life annuity of £7391 for £100,000 and expect to live for another 16 years. At the current gilt yield of 5% the annuity provider would have £34,000 of the annuitants cash when he died (exluding costs of administration).  This doen't seem like good value for the annuitant. Or am I missing something?

Cav

Niavely [and I don't pretend to know what I'm talking about here], I would have calculated an annuity rate as the 'repayment ratio' for a loan at 5% over 16 years [the life expectancy], and come up with:

  0.05 x [1.05 ^ 16] / [1.05 ^ 16 - 1]

= 0.05 x [2.183] / [1.183]

= 9.22% [£9,220 per £100k]

That it's not near your quoted rate could be a reflection of the likelihood that life expectancy [i.e. how much longer you can expect to live having lived to your present age] is rather more than 16 years at age 65. I would have assumed in this day and age something more like 20 - or even 25 years

Using '20' in place of '16' years gives a calculation of 8.02%, whilst using '25' years gives 7.10% - much closer. Is it possible that your L.E. figures are a bit 'unrealistic'?

M

caveat_emptor

Survival statistics are taken from standard mortality tables so the 16 years is realistic, but your calculation has answered my question. The annuitant should receive £9220/year but in fact receives only £7400 which puts the yearly costs at 20%.
???
Cav