Jul 05

Lifetime Annuities…only attractive if you live to 100!

A few weeks ago I mentioned that if you survive long enough, lifetime annuities are likely to offer the best return you could possibly get, thanks to the power of mortality credits. There are only two fixed annuity providers in the industry and I decided to analyse the rates of one of them. My analysis is pretty simple and doesn’t measure the fair value of the lifetime annuity with respect to current fixed interest yields but compares the lifetime annuity to a fixed term annuity to determine what one’s lifetime needs to be in order to break even.

Anyway, the table below shows that in order to justify purchasing a non-commutable lifetime annuity instead of a term certain annuity means that you need to live around 7 to 8 years longer than the average life expectancy of someone of the same gender and age! Good luck with that…lifetime annuities are not looking to be particularly good value at this point in time from this particularly provider…who is Challenger by the way…I can’t comment on Comminsure as I haven’t seen the rates (which are usually below Challenger’s!)

Tough gig if you have to live well into your nineties just to break even compared to a term certain annuity. The killer, so to speak, for lifetime annuities is that if you die beforehand the annuity finishes and payments stop, however for the term certain annuity at least the payments continue until the end of term.

Table 1 – Comparing Lifetime Annuity Prices to Term Certain Inflation Linked Annuities (Prices as 4 July 2011)


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