Annuity Prices, Money's Worth and Replacement Ratios: UK experience 1972 - 2002

Edmund Cannon and Ian Tonks

The Centre for Market and Public Organisation from The Centre for Market and Public Organisation, University of Bristol, UK

Abstract: In this paper we construct a time series of annuity prices from 1972-2002, and examine whether annuity rates are unfairly priced, and assess the extent to which annuitisation risks are hedged by stock market returns. We find no evidence that the average annuity rate is unfairly low. Depending on the assumptions about future longevity, the present value of an annuity (it's money's worth) is of the order of between 90 per cent and 100 per cent of the purchase price. Compared with the typical costs of buying financial services this figure looks suspiciously good. In addition, we find no reason to suggest that individuals are worse off by annuity rates being low, since this has been off-set by increases in the value of pension funds over the last thirty years. Even apart from the fact that people retiring today expect to live longer, their pension income (compared to their final salary) looks as good as ever.

Keywords: annuities; money's worth; replacement ratios (search for similar items in EconPapers)
JEL-codes: G23 J32 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2002-09
New Economics Papers: this item is included in nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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