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

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  • Edmund Cannon
  • Ian Tonks

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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.

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File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp51.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 02/051.

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Length: 33 pages
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:bri:cmpowp:02/051

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Keywords: annuities; money's worth; replacement ratios;

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  1. 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.
  2. 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.
  3. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  4. Cannon, Edmund & Tonks, Ian, 2004. "UK annuity price series, 1957 2002," Financial History Review, Cambridge University Press, vol. 11(02), pages 165-196, October.
  5. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
  6. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
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Cited by:
  1. Friedrich Breyer, 2004. "Auf Leben und Tod - Steigende Lebenserwartung und Sozialversicherung," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(2), pages 227-241, 05.
  2. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung," EconStor Books, ZBW - German National Library of Economics, number 92399, November.

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