Latest Government Actuary Department (GAD) analysis shows that the guaranteed rates of return available on annuities by around age 75 become so large relative to other investments that increasingly unrealistic investment returns need to be achieved in order to match or do better than the income that could be achieved through an annuity. Any investment vehicle with an expected yield greater than an annuity after 75 would inevitably be both expensive and carry a significant degree of risk, which people in the later stages of life may be ill-equipped to bear. Of course the optimal age for individuals to annuitise before 75 will depend on a range of individual circumstances.
A comprehensive academic survey on annuity pricing was published in March 2006. The authors conclude that after looking at the most recent analysis,
“The mark-up paid to life insurers—measured by the so-called money’s worth ratio—is relatively small and fairly constant, thus suggesting that annuities are fairly priced”.
These findings are in line with previous annuity pricing studies covering different countries and time periods. The full paper can be found at: http://www.dwp.gov.uk/asd/asd5/rports2005-2006/rrep318. pdf, DWP research paper 318 ‘Annuities—A Pricing Survey’, Edmund Cannon and Ian Tonks.
The Government are committed to publishing a technical paper setting out the evidence base for policy in this area later this year.