Can “Compulsory” Annuities Provide a Fair Pension?

Edward Martin and Noel FitzGerald

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: This discussion paper finds that since 2002 compulsory annuities no longer provide an actuarially fair pension. Hence annuities are a poor investment giving returns of less than 85% in present value terms. The paper uses a database of annuity rates collected from MoneyFacts monthly reports since 1994. This includes all products available on the market for Male Only aged 55 to 75 in 5 year increments. The present value of future annuity streams and their resultant moneys worth values (MW) are calculated and analysed, with particular attention to the actuarial aspects. The approach and results are independently confirmed giving a high degree of confidence in the findings. The analysis progresses on from the literature review of recent published work. The paper plots historic trends of annuity payout rates and their MW values and highlights some significant characteristics of the annuity market. While annuity rates can be expected to fall as life expectation rises no logical reason can be found to also justify the recent and significant reduction in their MW value below the actuarially fair value of 1.0. This research provides a valuable insight for developing strategies to guide the pensioner when formulating his income drawdown plans, especially in the light of recent A-day changes.

Pages: 40 pages
Date: 2006-07
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