Monday, August 13, 2012

Annuities just became less attractive

The UK's Daily Telegraph carried this article explaining why a court ruling will mean that men will get smaller annuities going forward.

Leaving aside the legal and social issues, the implication is very simple: if you are a man, then when you buy an annuity which falls under the new rules, you are effectively subsidising the women who buy annuities. This is because men (on average) will die at younger ages than women (on average) and annuities are priced based on the average life expectancy of the people in the relevant demographic. In effect, male purchasers who buy annuities will be paying for something that they will not be getting.

Since buying an annuity was always a somewhat marginal decision effectively involving accepting lower investment returns as the price for longevity insurance, the additional cost may well be enough to tip the balance against purchasing annuity. If I ever get to the point where I would consider an annuity, I will be asking some very pointed questions about the basis on which the quotes given to me are made.

Put simply, annuities just became even less attractive.

Since a lot of other goods and services effectively involve averaging risk across different groups of people (e.g. health insurance), I don't actually have an issue with the court decision itself - it's only the implications for myself as an investor that I am concerned with.


Anonymous said...

I wonder what they will do about "enhanced" annuities. By the same logic, these are also 'unfair'.

If you can prove that you have a medical condition (or that you smoke), you can get a larger annuity - something Insurance companies apparently forget to tell people about...

traineeinvestor said...

It would be only logical that if separate pooling/pricing is prohibited on the basis of gender then it should also be prohibited on the basis of illness or disability. I would expect that separation for smokers could be kept as that is a voluntary act.

I'm not surprised that the insurance companies don't tell customers about the better rates for some people - why give a better deal than you have to? If they were regulated in the same manner as brokers and banks, they would have to disclose their mark ups on these products - which would be a good thing.


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Unknown said...

This is interesting. I really enjoyed this post as well as the contributions by traineeinvestor and anonymous. I am not too well versed on this topic because I am only 20 years old and attended just two financial classes. I would like to bring this topic up this coming semester in my classes. I found a bunch of information on structured annuity , index annuity, variable annuity, and fixed annuity. I still am not fully aware of the differences, but I am sure I can use the vocabulary to decipher the meanings of each. Thanks for sparking my interests.