Annuities - "poor value at 75"

ReportInvestor

The FT

Bad news for those caught in the annuity "trap"

".....the pretty poor annuity rates for those aged 75. Given that typical life expectancy then is about 11 years, you would expect the annual income from a £100,000 annuity to be comfortably in excess of £10,000. Return of capital on its own would give you more than £9,000 a year (£100,000 divided by 11). Once this money is invested (annuity providers typically put their money into long-dated gilts which currently yield around 4.5 per cent), you should get a fair bit more. You’d expect therefore that you could glean an annual income of just under £13,000 from a £100,000 annuity. But the best annuity rates only just scrape 10 per cent, or £10,000 a year in this case. This equates to quite a big difference. Over the typical life expectancy of 11 years, that is a difference of almost £33,000 or £33,000 less than you could pass on to your heirs.

You have to ask whether annuities represent a good deal at this age. You also have to ask yourself what insurers are doing. Either they are investing their annuity money pretty badly. Or, as I suspect is the case, they are making some pretty conservative assumptions about the life expectancy of 75-year-olds.

The reality is (and pension experts agree) annuities are less compelling a deal for people in their 70s......"

What are the insurers up to here :rolleyes: :mad: ?

dunstonh

They are still paying for the overpayments made in the 80s along with more conservative accountancy methods (which everyone seems to be suffering with) and increased solvency requirements.

Get rid of the compulsion (I know we sort of have that now but its a messy fudge which may or may not stay)

ReportInvestor

So it's just like the with profits endowment mess?

New customers [press-ganged by the Treasury] pick up the tab for the insurers' past mistakes?

At least the government didn't force people into endowments like it forces people into annuities

It's scandalous. I think Rob Budden in his article was being exceptionally kind to the insurers.

I totally agree with getting rid of compulsion. This article suggests to me a dangerous common ground between the government & insurers for sticking with complusion .

Milarky

dunstonh wrote:

They are still paying for the overpayments made in the 80s along with more conservative accountancy methods (which everyone seems to be suffering with) and increased solvency requirements.

Double-take! You mean that, just like general insurers, who dip into the cash cow of motor insurance premiums to pay for the odd natural disaster in the US, pension insurers use a previously unmentioned for of cross-subsidy? I suppose they would have too really, wouldn't they? But in that case, a competitive market should simply lead to new entrants (without the existing pensioner classes on their books) to offer every-so-slightly better rates (in the knowledge that the existing providers are hobbled) Does this not happen or does the annuity market present barriers to entry? If so, could you venture what these are?

BTW, I seem to recall reading that insurers play a further trick/take an additional punt with anniutant money: That is they 'price' in bonds (i.e. paying interest as the bond rate) whilst maintaining exposure to equities - and skim this profit. (It's only human nature really)

DavidLaGuardia

ReportInvestor wrote:

The FT

Bad news for those caught in the annuity "trap"

".....the pretty poor annuity rates for those aged 75. Given that typical life expectancy then is about 11 years, you would expect the annual income from a £100,000 annuity to be comfortably in excess of £10,000. Return of capital on its own would give you more than £9,000 a year (£100,000 divided by 11). Once this money is invested (annuity providers typically put their money into long-dated gilts which currently yield around 4.5 per cent), you should get a fair bit more. You’d expect therefore that you could glean an annual income of just under £13,000 from a £100,000 annuity. But the best annuity rates only just scrape 10 per cent, or £10,000 a year in this case. This equates to quite a big difference. Over the typical life expectancy of 11 years, that is a difference of almost £33,000 or £33,000 less than you could pass on to your heirs.

You have to ask whether annuities represent a good deal at this age..... What are the insurers up to here :rolleyes: :mad: ?

I've just done the calculation here 4.5%. On £100,000 taking £13,000 at the end of each year (i.e. allowing maximum time for growth) Balance at end of year 9 is £8,182 i.e. it would not last 10 years!
On the face of it though £10,000 could be exceed on the same return, but the individual may live on longer and run out of money if not in an annuity.
I suppose if there is any gripe abouy annuties that I have is that the benefit from those that die earlier to the insurance company must exceed the loss paid to those living longer.
I am no actuary, but I assume that deaths would occur close to something resembbling a normal distribution round the mean life expectancy. Even if we skew the distribution, on the assumption that increasing longevity will mean more living beyond the mean age, it would take a lot for the insruance company no to make a massive amount.

EdInvestor

Milarky wrote:

Double-take! You mean that, just like general insurers, who dip into the cash cow of motor insurance premiums to pay for the odd natural disaster in the US, pension insurers use a previously unmentioned for of cross-subsidy?

Of course not Milarky, insurers are cuddly organisations providing a public service from which they generate no income whatsoever....

Does the annuity market present barriers to entry? If so, could you venture what these are?

It used to be the case that you could , err, adjust the discount rate on the liabilies and punt quite a bit of all that upfront cash in the stockmarket.

But after Equitable the FSA brought in some really boring new rules on solvency which meant you had to invest lots of this upfront money supplied by the annuitants in genuinely safe stuff like gilts, if you wanted to be in the annuity business.Strangely enough, not many companies are now interested in flogging annuities which are why they are so expensive.

dunstonh

The few new entrants to the annuity market do offer good deals but they tend to focus on the smokers, manual workers and higher risk categories of individual.

As Ed says, there isnt much interest in providing annuities.

margaretclare

dunstonh wrote:

The few new entrants to the annuity market do offer good deals but they tend to focus on the smokers, manual workers and higher risk categories of individual.

As Ed says, there isnt much interest in providing annuities.

So why all the ballyhoo about 'must take an annuity at 75, can't continue in drawdown unless you're a member of a minority Christian sect?'

I'm 71, my SIPP is in drawdown, I don't need more income, I don't need another annuity (got 3 already) and I intend to take annual income from my SIPP and put it straight back into my equity ISA. I am doing my best to die a rich woman, you see!!! And I have this 25-year old homeless, until recently jobless, gay granddaughter whom I'd like to provide for.

DH doesn't need any more income either!

Margaret