Enhanced annuities

Discussion in 'Pensions' started by Dan Murray, Jan 23, 2017.

  1. Dan Murray

    Dan Murray Frequent Poster

    Posts:
    265
    Just wondering has anybody had any experience with enhanced (sometimes referred to as impaired life, ouch) annuities?

    In particular, did you look into it and proceed or not? Did you feel that the uplift was fair? Ideally, I'd be interested in your "impairment" to get a sense of the relative value?
     
  2. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,035
    I've done a couple Dan. They were both cases of people who have had cancer in the past but are now clear. I didn't dig into what their life expectancy was now compared to if they hadn't cancer and then analyse the rates they got.

    They were both cases where the client wanted the secure income of an annuity and had no interest in the ARF option. So getting a better rate than the "normal" rate was seen as better value to them.


    Steven
    www.bluewaterfp.ie
     
  3. Dan Murray

    Dan Murray Frequent Poster

    Posts:
    265
    Thanks Steven,

    Much appreciated.

    One cheeky additional question - what % uplift did they get?
     
  4. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,035
    I ran a mock quote for you Dan

    Male, age 65, guaranteed for 5 years, no escalation - 4.2075%
    Same person had cancer within the last 5 years - 4.4171%

    For a pot of €500,000 that's €21,038 normal increasing to €22,086

    I ticked a load more boxes with smoker, heart attack, over weight and the rate went up to 4.9151% or €24,576.

    So it really depends on what is wrong with you. Not many people purchase annuities this days so it's not something I have looked into that much.


    Steven
    www.bluewaterfp.ie
     
  5. Dan Murray

    Dan Murray Frequent Poster

    Posts:
    265
    Thanks, as ever, for getting back, Steven.

    Thanks, also, for running the quotes. So definitely not shooting the messenger but what strikes me is how unbalanced the relationship between consumer and assurer is.

    Specifically, what I mean is that if we take it that, broadly, annuities are the inverse of whole of life (WOL) assurance - I simply cannot imagine the WOL premium being increased by a mere 1/6th if someone presented as an overweight, cancer and heart attack surviving, smoker! Am I missing something?
     
  6. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,035
    The actuarial basis for calculating enhanced annuity rates is something I have no knowledge of Dan. I can't help you on that one.


    Steven
    www.bluewaterfp.ie
     
  7. Gerry Canning

    Gerry Canning Frequent Poster

    Posts:
    2,517
    Steven .

    500,000 @ 25,000 = withdrawal lasts 20 years + any growth on fund.
    So Mr 65 ,with ailments will last past 85 ?
    So annuities when healthy ain,t too good , annuities when unhealthy ain,t too good either ?

    Dan , AMRF /ARF look {healthier} forgive the pun !
     
    Dan Murray likes this.
  8. Dan Murray

    Dan Murray Frequent Poster

    Posts:
    265
    Hi Gerry,

    I had a look last week on the Irish Life system. The annuity rate was less than 4% for a non-increasing pension for a 65 year old.

    So in your example of a purchase price of €500,000 - the emerging pension was...............just shy of €20,000 p.a.

    If we assume the insurer bases its calculations on an average life expectancy of 90! and a gross return in its matching sovereign bonds of c. 1% - you can kind of see where they might be able to, at a stretch, justify these figures.

    But.......to give a 5% enhancement (as per Steven's post) for those with serious medical challenges just seems like complete nonsense. Uafásach ar fád....
     
    Gerry Canning likes this.
  9. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,035
    I know. Annuity rates are incredibly bad value for money at present. There are benefits to them though:

    1. Guaranteed income for the rest of your life. People tend to be pessimistic about their mortality when it comes to annuities. It's always "what if I die within 5 years". It's never "they'll still pay me if I live to be 100!"
    2. No investment risk. You get a set amount no matter how the markets perform. This can be very beneficial when you are in old age, something you don't have to worry about.
    Most people go for the ARF option, but you do have:

    1. The stupid AMRF requirement. If you have a relatively small pot, this can take up a large chunk of your overall retirement income.
    2. Investment risk - you are at the mercy of the markets. Take too much risk you can lose a load of money. Take too little and imputed distribution and charges will erode the value of your fund.
    3. No guarantees. You manage the fund, you assume the risk. If it's all gone, it's your responsibility.
    Steven
    www.bluewaterfp.ie
     
  10. Dan Murray

    Dan Murray Frequent Poster

    Posts:
    265
    I think this is certainly true in respect of enhanced annuities!

    In terms of the "value" of regular annuities - are you saying that annuities are very bad value (a) relative to relevant bond yields or (b) because of relevant bond yields?
     
  11. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,035
    Relevant bonds yields are so low. Takes over 20 years to get your money back. When you're starting off the annuity in your mid 60's, it's a toss of a coin as to whether you'll get to see a return of funds at the end of 20 years.

    Steven
    www.bluewaterfp.ie
     
    Gerry Canning likes this.