From: "Tim" 
Newsgroups: uk.finance
Subject: Re: Stakeholder Pension fund
Date: Sun, 10 Aug 2003 09:56:23 +0000 (UTC)

"Ronald Raygun" wrote
> Nevertheless, in general I would expect annuity rates to be less than
> market returns (unless life expectancy is particularly low) because
> the annuity company must make a profit

I think the above applies more for higher rates of return;  for lower rates
of return, it could turn the other way around  [also, again it applies more
to younger ages - older people will find annuities probably pay out more] :-

If underlying returns are 10% (say), then if you have £1000 capital, you
could invest this to provide £100pa for every year into the future
(including after your death).  Now, if you are going to live for a very long
time (ie you are young) then the pure annuity rate (just allowing for
mortality, without any expenses/profit involved) will provide only just over
£100pa - which when reduced by expenses&profit could easily be below £100pa
as you say.

However, now suppose that underlying returns are 3% (say).  Each £1000
invested provides just £30pa.  You'd need to live for well over 33 years to
see a better return on that than buying an "expenses/profit - free" annuity.
Even if you allow 10% of purchase price for expenses&profit, then the
annuity factor would need to be over 30 to get less than £30pa from the
"competitive" annuity - which for anyone aged even 40+ is extremely
unlikely.

For anyone over the age of about 70, the annuity factor is likely to be less
than 10 under any circumstances - even allowing for expenses&profit.  So
you'd need a market return of at least 10%pa to keep up.



"Ronald Raygun" wrote
>  and as the annuity rate is
> fixed for life (isn't it?) they need to cover themselves for the
> risk that returns might drop, and the pensioner is in effect paying
> the annuity company premiums to insure against that risk.

Well, the usual investment strategy by the annuity company would be to try
to invest in "matching" fixed-interest gilts (or possibly IL gilts for an IL
annuity) - if they can find some with a suitable term etc.  Given that this
is possible (gilt terms being available up to 30 and not many annuitants
living longer than that), the annuity price would be calculated based on the
returns on those gilts - which (when held to maturity) is of course
guaranteed.

Hence not (necessarily) any risk to the annuity office.


>   There is still
> that wheeze whereby you can buy a £7.5k annuity for £5300 (or £3500 if
> HRTP), isn't there?

Yes - as I said in my earlier post, "the only benefit of a pension policy is
the tax-free lump sum - the one that some commentators say the government
should remove(!)".

>   Are annuity rates at
> age 50 so low so as to make the wheeze non-competitive with, say,
> investing in cash or long-dated gilts?

I doubt it.  The TFLS is (I believe) the best concession for pension
policies (at the moment).