Are annuities bad value?

There is undoubtedly a perception that annuities are bad value, and this has been the primary driver of pressure for reform in recent years.

Our instinct has been that although annuity rates have been falling (see the graph below), their buying power has not, as inflation has fallen sharply (in fact low inflation triggered low interest rates, which in turn made annuity rates fall).

Annuity rates are at their lowest for about 40 years. If you retired in the early 1960’s at age 65 you might have been expected to live for 12 years. Yet if you retire now you are more likely to live for another 22 years. On this simple measure it can be argued that annuities are somewhat better value than 40 years ago, even though rates are similar, because you will receive your annuity income over a much longer period.

Increased investment returns made up for falling annuity rates? It was reported that Annuity Direct carried out a survey of the 40 years up to 2000, covering three 30 year periods: 1960-1990, 1965-1995, and 1970-2000. Over each period investment returns varied, and so did the annuity rate at retirement date. Yet for each period the retirement income as a percentage of salary before retirement was 66%-69%. In other words rising investment returns substantially made up for falling annuity rates – this analysis confirmed our instincts.

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