Aviva announced last week that they want to shake up the annuity market. How will this be done? By offering higher annuity rates to everyone? No, by enhancing the rates to people who will die early; people with cancer, heart conditions or strokes.
They cite the fact that 1 in 4 annuities in the UK are at enhanced rates. But unlike in Ireland, people in the UK didn’t have a choice but to buy an annuity at retirement after their draw down period has expired. That is until the day after Aviva’s announcement when George Osborne changed the retirement rules his Budget speech. allowing people to manage their own pension pot. Somehow, I don’t think that statistic will be quite the same in the future.
So let’s have a look at what is on offer then. I am going to work off the figures given in their example in the Irish Independent. The figures I ran were slightly lower (and this was for the most basic pension you can buy) buy rates do change, so we won’t quibble over them.
In our example, we have a male, age 65 with a pension pot of €150,000. Aviva will pay him €7,500 for the rest of his life. The amount will not change for the lifetime of the plan and there is not spouse pension built in.
So let’s see how long he needs to live to be quids in on his annuity. I have compared this to an ARF with a new return of just 2% per annum.
Annuity | ARF | |
Pension Pot | €150,000 | €150,000 |
Income Paid | €7,500 | €7,500 |
Assumed return on pension pot | 0% | 2% |
Years required to break even | 20 years | 25 years |
Chances of living that long | 35% | 15% |
Now, let’s look at the enhanced annuity rate. To qualify for the enhanced rate, you must have had one of these: heart attack/bypass, angina, stroke, multiple sclerosis, cancer, Parkinson’s disease, kidney failure, heart, kidney, liver or lung transplant, motor neurone disease, peripheral vascular disease, hepatitis C, HIV. High blood pressure or diabetes aren’t eligible on their own unless you are a smoker.
Under Aviva’s enhanced rates, our 65 year old male will get an enhanced payment of €9,685 each year. So let’s have a look at how they fare.
Enhanced Annuity | ARF | |
Pension Pot | €150,000 | €150,000 |
Income Paid | €9,865 | €9,865 |
Assumed return on pension pot | 0% | 2% |
Years required to break even | 15 years | 18 years |
Chances of living that long | 58% | 45% |
So, there is about a 50/50 chance of them getting to the age where they will break even. The statistics I used are based on Irish Life Tables 2005-07 issued from the Central Statistics Office.
They say that if you reach age 65, the average male will live to be 81.6 and the average woman will live to age 84.8. Of course, to come to the average you take all the healthy people and all the not so healthy people and come to a number somewhere in between. This product is aimed at the not so healthy people who are not expected to live to 81.6 or 84.8 respectively.
Annuities do have a place in the market, especially for those who want certainty over their income in retirement. But given the ARF option is open to almost all defined contribution pensions today, I cannot see how people with a lower life expectancy can benefit from this new offering over an ARF?