Annuity Value

collieman

My last post was somewhat hijacked and went a bit off course so I'll be a bit more specific. When someone uses their pension pot to buy a LEVEL annuity, can the value of the annuity ever be more than the purchase price? I know some will say that an annuity doesn't have a value but it does when it comes to valuing marital assets in a divorce. Pensions and annuities can sometimes be the largest value asset in a marriage and must be valued. Pension pots are easily valued by using fund values on a specific day but what about annuities? If the value can be more then surely it is an investment and should be sold on the basis of being made clear to the purchaser that the value can go up as well as down?

kidmugsy

You could calculate the present value of the stream of future payments, but you'd need (i) to guess a date of death, and (ii) to choose a discount rate - you'd presumably use the yield on the gilt that matures nearest the guessed-at date of death.

Or you could just use the cost of a new annuity on otherwise identical terms. This latter would be the more attractive solution, I'd say.

Thrugelmir

collieman wrote: »

If the value can be more then surely it is an investment

There is no value. Just a guaranteed income stream for the life of the annuity holder (and their dependent if applicable). Annuities are a pooled risk. There's not a separate investment pot.

AnotherJoe

collieman wrote: »

If the value can be more then surely it is an investment and should be sold on the basis of being made clear to the purchaser that the value can go up as well as down?

Why limit it to more? You could argue if the value could be less its also an investment after all investments can go up and down.

Anyway what difference would it make? If someone wishes to take out an annuity the fact it may have a higher or lower value in a divorce than was originally spent, that value of the future income stream is not something that could be established at the time it was taken out.

If a mans annuity was split 50/50 the higher longevity of women might alter the value one way, if it was a woman it would be the other, woulddepend on their ages at the time of split, if one partner had reduced life expectancy then that would affect the value, the fact its split two ways instead of one would tend to seeing it reduced for both, and so on.
Do i take it theres a chip on your shoulder here and you are feeling hard done by?

AnotherJoe

Thrugelmir wrote: »

There is no value. Just a guaranteed income stream for the life of the annuity holder (and their dependent if applicable). Annuities are a pooled risk. There's not a separate investment pot.

What OP is trying to say (I think) is that in a divorce, lets say one person has an annuity of £10k/year, then "someone" (court? lawyers? accountants?) might say "OK that £10k income stream is worth (say) £200k to you since we think you'll live for 20 years so you keep the £10k/year and the other partner gets an extra £200k from the joint assets .And now you are even."

And hes complaining because (again hypothetical) he may have spent £150k (eg less than £200k) to buy that annuity but now is being penalized.

Although as someone posted said its much more likely the value will fall because to buy an annuity at (say) age 60 will cost more than to buy it at age 70.

Linton

Sounds like a job for an actuary. If its for a divorce surely you need a professional valuation.

collieman

I never mentioned an "annuity share" and there isn't going to be a share so no annuities will be split. Asset offsetting will be used as that's the preferred option nowadays. I just wanted to see if anyone else is aware of what happens to annuity valuations on divorce and to warn them that regardless of them getting older and less time to live, the annuity value can be greater than the purchase price. Insurance companies value annuities on a "the value to us is" basis instead of "the value to you is" basis and probably not many facing divorce are aware of this. All this is kept very quiet when an annuity is purchased.

Thrugelmir

collieman wrote: »

All this is kept very quiet when an annuity is purchased.

I doubt it's a question at the top of most people's lists. Many compexities exist in the equitable division of marital assets.

AnotherJoe

collieman wrote: »

I never mentioned an "annuity share" and there isn't going to be a share so no annuities will be split. Asset offsetting will be used as that's the preferred option nowadays. I just wanted to see if anyone else is aware of what happens to annuity valuations on divorce and to warn them that regardless of them getting older and less time to live, the annuity value can be greater than the purchase price. Insurance companies value annuities on a "the value to us is" basis instead of "the value to you is" basis and probably not many facing divorce are aware of this. All this is kept very quiet when an annuity is purchased.

Surely its the value to you thats the value that needs to be used? Can you challenge that?

Linton

I do not see why there should be any difference between a “ value to you” and “a value to us”. As fas as I know there is one standard way of valuing future income and that is Discounted Cash Flow. Under DCF the value now is is what is required now to produce the successive payments in the future using an assumption that the money now is very safely invested in gilts. For annuities it would be more difficult because the date of death is not known. However bring in probabilities from standard life charts and a mathematically justifiable number can be calculated.

If interest rates fall then it is perfectly possible that at times the decrease in total future payments as you approach death is outweighed by the greater amount of money you need now to finance them.

How else would you determine the “value to you”? This is why I suggested you consult a professional.

Thrugelmir

AnotherJoe wrote: »

And hes complaining because (again hypothetical) he may have spent £150k (eg less than £200k) to buy that annuity but now is being penalized.

Then you are moving into the realms of who contributed what, earnt what. People making unilateral decisions within a relationship. Any outcome has to be based on the position at the point of separation looking forward.