Laughable annuity quotes

mike004

A simple calculation to illustrate why I believe annuity rates are very shabby:

A pensioner gives the insurance company a 100k lump sum.

The insurance company invests the lump sum, and gets 4% per annum.
The insurance company pays the pensioner 5k per annum.

After 25 years, the lump sum is worth 266k.
The pensioner dies, he has received 125k.
The insurance company is over 140k up on the deal.

That seems too much skewed in favour of the annuity provider.

Linton

mike004 wrote: »

A simple calculation to illustrate why I believe annuity rates are very shabby:

A pensioner gives the insurance company a 100k lump sum.

The insurance company invests the lump sum, and gets 4% per annum.
The insurance company pays the pensioner 5k per annum.

After 25 years, the lump sum is worth 266k.
The pensioner dies, he has received 125k.
The insurance company is over 140k up on the deal.

That seems too much skewed in favour of the annuity provider.

You are very confused - I think you have forgotten to deduct the £5000 each year from the lump sum. So the insurance comany is getting 4% on a decreasing lump sum each year.

£100000 could actually give you £5750 or there abouts at 65. With your errors fixed you get the pot running out completely at around 29 years. Now where did you get a 4% return from???? Insurance companies have to put the money in very safe investments. Very safe investments are not paying 4% at the moment. Change the figure to 3% and you get the pot running out at about 24 years, which is close to the life expectancy for a healthy male.

dunstonh

A pensioner gives the insurance company a 100k lump sum.

Ok, so assuming basic rate tax, it takes you to £125,000 (ignoring growth and tax free status). You then get 25% tax free cash back (£31,250). So, net cost is £68750.

Annuity rate of say 5.7% for 65 is applied to that pot left which is £5343 p.a. A break even point of just under 13 years.

That seems too much skewed in favour of the annuity provider.

Thats because your calculations are wrong.

FatherAbraham

mike004 wrote: »

This is the industry that mucked up traditional with-profits schemes and endowment mortgages so badly that no-one will touch them nowadays.

Surely you mean, "this is the industry which has been running efficient life-insurance and annuity business for centuries, with incremental improvements in actuarial science delivering even more efficiencies as time has gone by"?

Ironically, the endowment mis-selling scandal was really caused by the market demanding ever-higher projected returns (and therefore rewarding those sellers who did this). The overly-optimistic returns were illusory, and those who have relied on them have come unstuck financially.

You're now calling for the annuity industry to raise return rates to imprudent levels in the same way. Shame on you!

It's clear you don't even believe what you say, because if you did, you wouldn't be moaning about this "excessively lucrative" business -- you'd be buying up all the shares of annuity providers you could lay your hands on, or else starting your own!

Warmest regards,
FA

mike004

Linton wrote: »

You are very confused - I think you have forgotten to deduct the £5000 each year from the lump sum. So the insurance comany is getting 4% on a decreasing lump sum each year.

£100000 could actually give you £5750 or there abouts at 65. With your errors fixed you get the pot running out completely at around 29 years. Now where did you get a 4% return from???? Insurance companies have to put the money in very safe investments. Very safe investments are not paying 4% at the moment..

Thank you for pointing out my miscalculation.
Re: the 4% return. Pension companies use figures of 5%, 7% and 9% in their projections...so they must be able to return 4%, surely?

mike004

FatherAbraham wrote: »

Surely you mean, "this is the industry which has been running efficient life-insurance and annuity business for centuries, with incremental improvements in actuarial science delivering even more efficiencies as time has gone by"?

Ironically, the endowment mis-selling scandal was really caused by the market demanding ever-higher projected returns (and therefore rewarding those sellers who did this). The overly-optimistic returns were illusory, and those who have relied on them have come unstuck financially.

You're now calling for the annuity industry to raise return rates to imprudent levels in the same way. Shame on you!

It's clear you don't even believe what you say, because if you did, you wouldn't be moaning about this "excessively lucrative" business -- you'd be buying up all the shares of annuity providers you could lay your hands on, or else starting your own!

Warmest regards,
FA

So your advice to posters who disagree with you is to start their own insurance company? Bizarre.

And surely, the shame is on the people who mis-sold those financial products in the first place.
Shame on you, for defending bandits who rip off people like this.

Linton

mike004 wrote: »

Thank you for pointing out my miscalculation.
Re: the 4% return. Pension companies use figures of 5%, 7% and 9% in their projections...so they must be able to return 4%, surely?

The higher the return the more volatile the investment. Insurance companys cant take the risk of a temporary 50% drop in share values as they must continue to pay out the guaranteed annuity regardless. You as a pension investor shouldnt care about a temporary drop in values - you are investing for the very long term.

Also of course there are the insurance company's costs. They need to for example run a PAYE system for income tax on annuities, run a call centre, pay for a large computer system etc etc. These will be paid for from the investment return.

dunstonh

Re: the 4% return. Pension companies use figures of 5%, 7% and 9% in their projections...so they must be able to return 4%, surely?

You are mixing things up again. They do not use 5,7 & 9 on annuities. They cannot use investments that have that sort of potential either.

Stargazer57

mike004 wrote: »

So your advice to posters who disagree with you is to start their own insurance company? Bizarre.

That wasn't his advice. You contend that annuity business is highly profitable. FA (and others) point out that if this was so there would be a lot of companies trying to get into this business, and buying their shares would be a good bet. There aren't. The evidence (boring I know to actually look at it) is that there are four or five companies competing for annuity business, with some of these entering or exiting from time to time. Others specialise in areas such as impaired lives. This is a sign of a well functionning market that serves consumers well.

Other companies choose not to compete on rates. They rely on inertia to bring them a supply of profitable business from those who have saved with them during the accumulation phase and are too lazy to shop around at retirement. I suspect that the quote you keep going on about, yet reveal so little of, is from one of these companies.

mike004

Thanks for your reply.
But the obvious supplementary question here is:
"Anyone can just stick the money in gilts. They are not doing much active investment, are they?"