James Daley

By James Daley

Annuity rates have plummeted in recent years - as a result of a combination of falling interest rates and increasing longevity. But does that mean they're bad value? That's the question posed by a report publised today by the International Longevity Centre - a think tank backed by, amongst others, annuity providers.

The report does some interesing maths to analyse the value that annuities provide. And comes up with what looks like a fair way of assessing how much money insurers are making. Making some assumptions about gilt rates and life expectancy, it tries to work out whether the average person is likely to get back more or less from their annuity than they've put in. It's conclusions are that for those who offering the keenest rates, the average outcome is anything from a loss to the insurer through to an 18% gain. While for the worst rates, it concludes that insurers are winning by as much as 25%.

In aggregate, it summises that for the most part, consumers are getting a good deal. But there's a case to be made that some men, particularly those who are annuitising later, could be doing better.

What does it really cost to provide an annuity?

The problem with this is analysis is that there's nothing more than a cursory glance at what insurers' costs are. The report references a paper written 8 years ago which estimates insurers costs might be in the region of 10%, but this seems to be a shot in the dark.

I don't disagree with the broad thrust of the report that annuities can still be good value - especially if you shop around and get the best possible deal. But not enough attention is given to the fact that at the bottom end of the market there are people getting appalling deals - appalling because of factors both within and beyond the insurers' control.

Writing annuities is undoubtedly a complex and risky long-term business. But my take from the ILC paper is that many insurers have been cleaning up over the past few years - and an injection of true competition in this market is long overdue.