Even before annuity rates dropped to the low rates that they are today, annuities had very much given way to the ARF as the retirement option of choice.
Even though they were giving up guarantees and assuming all the investment risk, retirees preferred to have control of their own retirement fund. One of the biggest reasons for this shift was fear of dying too young and the insurance company profiting from their death.
Insurance companies don’t actually profit from someone dying early, other retirees do; the people who live too long. The annuity rate that you receive is actuarially calculated. The actuaries are aware that some people will outlive their assumptions while others will die before. The people who die too young pay for the people who live too long.
What are the chances of dying too young?
Thankfully the CSO keep track of mortality rates in this country and they issue them in the Irish Life Tables. We are able to see the average life expectancy in Ireland as well as your life expectancy if you reach a certain age.
A man who gets to 60 years of age lives for another 22.46 years on average while a woman lives for another 25.33 years. Men who get to 65 live for another 18.28 years while the average woman lives for another 20.97 years.
Will you get your money back from an annuity?
If you live the average life, will buying an annuity see the life companies make a big profit from you or will you win out? Below is the return for an annuity for a single person, non escalation person for a pension pot of €500,000. As the Irish Life table are used in setting annuity rates, it is pretty even.
ARF
Even if annuity rates increase, I still expect the ARF to be the main retirement vehicle going forward, purely because it gives people more choice. You take all the investment risk but the 23 years of experience we have with ARFs have shown retirees to be responsible with their money and not flitter it away.
It also gives retirees the ability to take out larger lump sums if they want to. And of course, if they die with some money left in their policy, it can go to their spouse and then their children. Given how much Irish people like to leave an inheritance, that’s almost as important as anything else!!
Steven Barrett
12 September 2022