Brendan Burgess
Founder
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Annuities deserve a fresh look
Older pensioners can benefit from out-of-favour retirement instruments
www.ft.com
The analysis confirms that at age 60 the optimal strategy for the individual is likely to be to enter drawdown. This would generate a 10 per cent higher satisfaction score than an annuity, chiefly because the individual stays invested for longer.
But, crucially, there is a crossover point at which an annuity becomes more attractive. Based on the assumptions we have made about this individual’s attitudes and goals, the crossover point is around age 67. Beyond this age, an annuity becomes progressively more attractive. mainly because the removal of longevity risk becomes increasingly more appealing.
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One crucial driver of our results is the fact that life expectancy becomes proportionately more uncertain as you get older, and hence the certainty of an annuity becomes more valuable with age. To illustrate this point, consider a man aged 60. His life expectancy is around 26 years, so on average he should live to 86. When managing his retirement pot in drawdown what matters is not just spreading that pot over 26 years but also planning for what happens if he lives much longer. However, at 60 he can essentially forget about the “risk” of living double the average lifespan, as this would mean living to the age of 112. Now consider a man aged 80. His average life expectancy is just over eight years, so he might plan to make his money last to age 88. But in this case it is not inconceivable that he could live twice as long as expected — to age 96. Indeed, the Office for National Statistics suggests that around one in nine men aged 80 will live to 96, so this is a risk he cannot ignore.
