Report spells out mortality drag case for annuities
The report, called The Case For Annuities, shows the speed at which the hurdle rate needed off drawdown funds accelerates for enhanced annuity customers, rising from 3 per cent at age 60 to over 9 per cent by age 80. The report calculates enhanced annuity customers’ mortality drag – the return annuitants receive attributed to the sharing of the pots of those annuity customers who have already died – increasing from just under 1 per cent at 60, rising to 2 per cent at age 70 and then increasing to almost 7 per cent by age 80.
For those without health conditions that would entitle them to an enhanced annuity, such as high blood pressure, diabetes and obesity, the hurdle rate rises from just over 2 per cent at age 60 to 5 per cent by age 80. For this group, mortality drag starts almost at zero, rising to 1 per cent by age 70 and just under 3 per cent by age 80.
The report, which was sponsored by enhanced annuity provider Partnership Assurance, concludes that while alternative solutions such as drawdown often look more attractive, they rarely are.
Retirement Intelligence’s Billy Burrows says: “The grass may look greener, but it rarely is. Annuities are a hard act to beat.
“It is important to separate the benefits of annuitisation from the poor image associated with some annuity policies. The case for annuities can be made strongly on a number of fronts when the benefits such as a guaranteed income for life are examined and the outcomes compared to products such as drawdown. As the mortality drag chart shows, annuities, especially enhanced, are a hard to beat when compared to drawdown. The investment returns required to maintain the annuity purchasing power increase with age and this is the time when investors should be taking less risk not more.”
Partnership director Andy Megson says: “As an enhanced annuity provider, we are obviously convinced of the benefit of our products but we felt it was important for them to be analysed by analysed by a well-respected independent commentator. This is a report that advisers and consumers can use to fully understand when and why annuitisation makes sense. Mortality drag is one of the least understood aspects of annuities and this paper helps to explain this phenomenon as well as clearly highlights where and why annuities still have an important place and are beneficial for many retirees.”