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Annuity Prices, Money's Worth and Replacement Ratios: UK experience 1972 - 2002

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  • Edmund Cannon
  • Ian Tonks

Abstract

In this paper we construct a time series of annuity prices from 1972-2002, and examine whether annuity rates are unfairly priced, and assess the extent to which annuitisation risks are hedged by stock market returns. We find no evidence that the average annuity rate is unfairly low. Depending on the assumptions about future longevity, the present value of an annuity (it's money's worth) is of the order of between 90 per cent and 100 per cent of the purchase price. Compared with the typical costs of buying financial services this figure looks suspiciously good. In addition, we find no reason to suggest that individuals are worse off by annuity rates being low, since this has been off-set by increases in the value of pension funds over the last thirty years. Even apart from the fact that people retiring today expect to live longer, their pension income (compared to their final salary) looks as good as ever.

Suggested Citation

  • Edmund Cannon & Ian Tonks, 2002. "Annuity Prices, Money's Worth and Replacement Ratios: UK experience 1972 - 2002," The Centre for Market and Public Organisation 02/051, The Centre for Market and Public Organisation, University of Bristol, UK.
    • Handle: RePEc:bri:cmpowp:02/051
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp51.pdf
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    References listed on IDEAS

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    1. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-788, September.
    2. Cannon, Edmund & Tonks, Ian, 2004. "UK annuity price series, 1957 2002," Financial History Review, Cambridge University Press, vol. 11(02), pages 165-196, October.
    3. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
    4. Brown, Jeffrey R. & Mitchell, Olivia S. & Poterba, James M. & Warshawsky, Mark J., 2001. "The Role of Annuity Markets in Financing Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262529130, December.
    5. Miles, David, 1997. "A Household Level Study of the Determinants of Incomes and Consumption," Economic Journal, Royal Economic Society, vol. 107(440), pages 1-25, January.
    6. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
    7. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, vol. 112(476), pages 28-50, January.
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    Cited by:

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    2. Fong Joelle H. & Lemaire Jean & Tse Yiu K., 2014. "Improving Money’s Worth Ratio Calculations: The Case of Singapore’s Pension Annuities," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 8(1), pages 1-26, March.
    3. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung: Kurzfassung," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92399, March.

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    More about this item

    Keywords

    annuities; money's worth; replacement ratios;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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