Laughable annuity quotes

PipPip

A few years ago I worked on a business case for a well known UK investment and insurance business to enter the annuity market. The actuaries at the head office rejected it wholeheartedly. People are living longer and the returns insurance companies can achieve from investing in the required low risk assets are low. Overall the rewards for the longevity risks taken by the insurance company and consequential risk capital the insurer must hold were deemed very unattractive and the business case was rejected. Unfortunately the man in the street thinks financial services companies are ripping them off with products like annuities when the reality is very different. They are fleeced much more rabidly by the likes of Tesco but complexity prohibits understanding.

Linton

mike004 wrote: »

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?"

Why should they??? The need for active management increases risk.

It's not just a matter of "sticking money in gilts". Gilts and equivalent safe investments pay out a fixed amount for a fixed time period at which point you get your original investment back. So to minimise risk you need to manage your affairs so that at any one time you have a wide range maturity dates broadly in line with the timescales of your commitments to pay out future annuities. Bearing in mind that people's deaths are statistically scattered around the mean which is itself changing over time this is not straightforward. Which is why actuaries are well paid.

Old_Slaphead

I'm fairly ambivalent on whether annuity companies are providing a 'good deal' or are making exaggerated profits - but am enjoying the debate.

Here's a few numbers to add to the issue.

Man aged 65 £100,000 fund, standard pension, no dependants no indexing.
Average life expectancy 18.9 years - say 19.
Returns based on 20 year gilts - around 2.7%
Current annuity offer - based on Aviva quick quote = £5450pa

My spreadsheet calc. shows that after 19 years there will still be around £33,000 in the fund - which would fund a pension for a further 6 years.

To achieve a breakeven after 19 years implies charges of around 2.5% which over the lifetime of the policy amounts to around £35,000. That seems fairly generous given that admin - other than setting up an initial DD - is negligible.

Are my figures realistic or am I missing something

Linton

Old_Slaphead wrote: »

I'm fairly ambivalent on whether annuity companies are providing a 'good deal' or are making exaggerated profits - but am enjoying the debate.

Here's a few numbers to add to the issue.

Man aged 65 £100,000 fund, standard pension, no dependants no indexing.
Average life expectancy 18.9 years - say 19.
Returns based on 20 year gilts - around 2.7%
Current annuity offer - based on Aviva quick quote = £5450pa

My spreadsheet calc. shows that after 19 years there will still be around £33,000 in the fund - which would fund a pension for an further 6 years.

To achieve a breakeven after 19 years implies charges of around 2.5% which over the lifetime of the policy amounts to around £35,000. That seems fairly generous given that admin - other than setting up an initial DD - is negligible.

Are my figures realistic or am I missing something

From the ONS tables average life expectancy for someone aged 65 now is nearer 22 years. I would guess the 18.9 years you use is based on life expectancy at birth, but of course you need to discount those who died before they reached 65. Then you have to allow for the risk that the actuarial tables may be wrong and currently unknown medical advances are more likely to increase than decrease life expectancy. Finally you have expenses which will take some fraction of a percent off the crude gilt return.

So it seems to me that the profit/loss balance on annuities is very tight especially as a lot can happen in 20 years.

dunstonh

So it seems to me that the profit/loss balance on annuities is very tight especially as a lot can happen in 20 years.

As happened during the 80s and 90s where life expectancy increased beyond anything predicted and left insurers facing massive losses. Indeed, it brought one insurer down. The risk can be significant if the assumptions are wrong by too much.

Old_Slaphead

Linton wrote: »

From the ONS tables average life expectancy for someone aged 65 now is nearer 22 years. I would guess the 18.9 years you use is based on life expectancy at birth, but of course you need to discount those who died before they reached 65.

I think UK life expectancy at birth is slightly more than 19 years.

I checked several calculators and used an average based on a man with DOB 4/4/1948.

I surmise that the mid 80s life expectancy anticipated increases in longevity over the next 2 decades through medical innovation.

mike004

Good point about charges.
Does the insurance company take a setup fee. And what about management fees, for something that is not "actively" managed?

GhIFA

mike004 wrote: »

Good point about charges.
Does the insurance company take a setup fee. And what about management fees, for something that is not "actively" managed?

The insurance company's costs are factored into the rate they offer you. As you say, the money is not being actively managed, therefore there are no ongoing charges.

Linton

Old_Slaphead wrote: »

I think UK life expectancy at birth is slightly more than 19 years.

I checked several calculators and used an average based on a man with DOB 4/4/1948.

I surmise that the mid 80s expectancy builds in predicted increases in longevity over the next 2 decades

Yes - but the total number of people with DoB 4/4/1948 that comprise the average include those who have already died. These dead people wont be buying annuities. The average life expectancy of those people who buy annuities will be therefore higher than the average of all those born on 4/4/1948.

There is another factor - people who buy annuities will tend to be richer than average and the richer people are the bigger annuity they will buy. Rich people tend to live longer than poor people. So the annuity biased average life expectancy experienced by insurance companies would be expected to be higher than the national average across the whole population.

Old_Slaphead

Linton wrote: »

Yes - but the total number of people with DoB 4/4/1948 that comprise the average include those who have already died. These dead people wont be buying annuities. The average life expectancy of those people who buy annuities will be therefore higher than the average of all those born on 4/4/1948.

There is another factor - people who buy annuities will tend to be richer than average and the richer people are the bigger annuity they will buy. Rich people tend to live longer than poor people. So the annuity biased average life expectancy experienced by insurance companies would be expected to be higher than the national average across the whole population.

I didn't use insurance co specific calculators - but I accept your point. That however makes it look as tho' Insurance Companies are making up their own rules and using longer lifespans to reduce rates. I'm also assuming rates are already adjusted for lifestyle/health issues where appropriate in the monthly amounts.

Also I assume if I put my DOB in a life expectancy calculator as 4/4/48 the calculator won't anticipate that I'm already dead

It still seems to me that profit margins on annuities are 'generous'