I return like a dog to vomit to the age old question “so what are you going to do for income when you stop earning?”.
It seems that most people do not consider getting old an option. Which is perverse as we are blitzed with the “you and I are going to live forever” forebodings of the demographic timebombers.
People do not want to insure against living too long because they are certain they are going to die young. Some will be right, most will be wrong.
As a nation we are Townsendian rathan than Gallaherailian in our outlook. Which may be why we don’t comparethemarket.com annuity rates quite as avidly as we do our motor insurance premiums.
For another way of putting it, I refer you to
http://eprints.lse.ac.uk/24899/1/dp473(revised).pdf a research paper by Paula Lopes which asks the question “Are annuities value for money?” and “who can afford them?”.
Here’s what her research told her.
“The model draws some interesting predictions. First, the welfare calculations on
the access to annuities markets show that nominal annuities are welfare improving
even when sold at the empirically parameterized cost, which is above fair value. Real
annuities are welfare improving over nominal annuities when sold at a fair price,
but when we incorporate the empirically parameterized annuity premium the gains
become negative at all wealth levels”.
Put even more simply she thinks annuities are a good thing in principal but rubbish in practice. Which backs up what people have been saying to me for 25 years.
On the other hand we have some very strong research from the brothers Orzag which though a few years old now has not been superceded. It finds that relative to the costs of building up a pension, annuities are really rather good value. http://www.oecd.org/dataoecd/30/61/2402277.pdf
If anyone has been following recent developments on the proposed EU Solvency II directive, then they may have noticed that the levels of annuity income that can be bought from the Pension Pound is estimated to fall by as much as 10% from 2012. (see Investors Chronicle-30th June -article by Maike Currie).
If annuities are relatively good value and we can still buy at pre 2012 rates (with protection from our freinds in Canary Wharf) I would have thought that there would be a fair degree of interest on a “buy now while rates last” basis.
The old chestnut “my house is my pension” is wearing a bit thin-even if you could buy a sausage with a brick. The money markets are hardly a source of solace to the pensioner so you’d have thought that the purchased life annuity would be making an overdue comeback.
But I fear that a combination of the Townsendian aspiration and a reluctance to pay the annuity premium will continue to make annuities as popular as a f**t in a lift.