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The Gordon Midgley Memorial Debate 2008
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The Gordon Midgley Memorial Debate 2008
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Drawdown Will Eventually Replace Annuities Tom Boardman The Gordon - - PowerPoint PPT Presentation
Drawdown Will Eventually Replace Annuities Tom Boardman The Gordon - - PowerPoint PPT Presentation
Drawdown Will Eventually Replace Annuities Tom Boardman The Gordon Midgley Memorial Debate 2008 1 Annuitisation Puts capital at risk in exchange for receiving a mortality cross-subsidy Does not have to take place at the time an
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Total 2007 UK retirement income market
Source: ABI
Conventional annuities now
account for 68% of the total retirement income market compared to 67% in 2001
Income Drawdown accounts
for 27% of the market compared to 28% in 2001
(£4,012m) (£748m) (£10,279m)
Total Market £15,039m
68% 5% 27%
Conventional Annuity Investment Linked Annuities Income Drawdown
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Source: ABI
Nearly 450,000 new Annuities 44,600 new Income Drawdown
cases
A long way to go before
Drawdown replaces annuities!
44,599 19,589 448,942
Total Market 513,130 cases
87% 4% 9%
Conventional Annuity Investment Linked Annuities Income Drawdown
Total 2007 UK retirement income market
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Annuity Funds Distribution 2007
Source: ABI
Less than 5% of the annuities purchased were with funds over £80,000
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Less than £30,000 £30,000- £49,999 £50,000- £79,999 £80,000- £99,999 £100,000- £149,999 £150,000+
% of total annuity cases
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The lifetime income guarantee provided by an annuity is funded by investment growth, the annuitant’s own capital and the capital released by those dying early …
Expected composition of each annuity payment for a male aged 65 purchasing an annuity for £100,000 providing an income of £7,773 payable at the end of each year to all annuitants still alive.
£
AGE
ANNUITY WITH NO DEATH BENEFIT MALE 65 - £7,773
1000 2000 3000 4000 5000 6000 7000 8000 65 70 75 80 85 90 95 100 105 110 Growth after charges Capital Cross-Subsidy
Source: Own analysis using 100% PNMA00 medium cohort 2007
AGE
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In the early years the investment growth is the most significant constituent of the income payment and the cross-subsidy is small …
£
AGE
ANNUITY £7,773 NO DEATH BENEFIT MALE 65
1000 2000 3000 4000 5000 6000 7000 8000 65 70 75 80 85 90 95 100 105 110 Growth after charges Capital Cross-Subsidy
Limited cross-subsidy
Source: Own analysis using 100% PNMA00 medium cohort 2007
AGE
Investment growth significant
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As annuitants get older the impact of mortality cross subsidy grows rapidly …
£
AGE
ANNUITY £7,773 NO DEATH BENEFIT MALE 65
1000 2000 3000 4000 5000 6000 7000 8000 65 70 75 80 85 90 95 100 105 110 Growth after charges Capital Cross-Subsidy
Limited cross-subsidy Significant cross-subsidy
Source: Own analysis using 100% PNMA00 medium cohort 2007
AGE
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The funds of those dying in a year are spread over the lives surviving …
The scale of the mortality cross subsidy at older ages makes annuitisation essential for anyone without extensive alternative wealth.
Source: PNMA00 100% medium cohort; 2007 Mortality cross-subsidy = qx / (1-qx)
AGE
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 65 70 75 80 85 90 95 100
MORTALITY CROSS-SUBSIDY AS A PERCENTAGE OF THE ANNUITISED FUND MALE AGED 65 IN 2007
Mortality Cross-Subsidy %
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ANNUITY £20,401 NO DEATH BENEFIT MALE 85
£
AGE
Limited Investment Growth Significant cross-subsidy
5000 10000 15000 20000 25000 85 90 95 100 105 110 Growth after charges Capital Cross-Subsidy
At age 85 the cross-subsidy provides half of the guaranteed income and continues to grow in significance …
Source: Own analysis using 100% PNMA00 medium cohort 2007
Significant cross-subsidy
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It is not a question of IF but WHEN pensioners should fully annuitise …
How can we change the rules to better meet pensioners’ needs?
Limited Value from annuitisation – Death benefit seen as more valuable Annuitisation increasing essential to provide income for life
Mortality Cross-Subsidy %
Source: PNMA00 100% medium cohort 2007 Mortality cross-subsidy = qx / (1-qx)
AGE
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 65 70 75 80 85 90 95 100
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Money Back Guarantee – The Consumers’ Perspective …
THE CONSUMER BENEFITS
- Removes single biggest consumer objection to annuities:
“If I die soon after I retire, the annuity provider will keep my fund”
- ‘Live or die’ guarantee of getting your money back provides a simple
underpin in the mass market
- More readily understood than continuation of current income for a
limited period On death any excess of the original purchase price over the gross annuity payments already received is returned to the annuitant’s estate.
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Money-back annuities provide a guaranteed return of capital and allow full phasing into annuitisation …
% £ PURCHASE PRICE
PROPORTION OF FUND ANNUITISED UNDER A MONEY-BACK ANNUITY FOR A MALE AGE 65
20 40 60 80 100 6 5 6 7 6 9 7 1 7 3 7 5 7 7 7 9 8 1 8 3 8 5 AGE
Annuitised Not Annuitised BENEFITS UNDER A MONEY-BACK ANNUITY - MALE AGED 65
20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 65 67 69 71 73 75 77 79 81 83 85 AGE AT DEATH
Accumulated Income Death Benefit
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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 65 70 75 80 85 90 95 100 105 110 115
Age %age dying
Random risk
Two charging methods for securing a guaranteed lifetime income: All or part of the capital of those dying early is used – the traditional lifetime annuity approach All policyholders pay an extra charge up to time of death or fund exhaustion – the Variable Annuity approach
Charging for longevity insurance …
Any scheme designed to pay guaranteed income to those who live beyond their life expectancy requires some form of cross-subsidy
cross-subsidy
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Annuity charging approach …
Cross-subsidy to those living longer from those dying earlier Those dying earlier lose out significantly Those living longest benefit most Achieves highest lifetime guaranteed income
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Variable Annuity charging approach
Fund charges made for guarantees Those dying early provide only a modest cross-subsidy to those living longest Higher death benefits Lower guaranteed lifetime income Any move to providing higher guaranteed incomes closer to the levels provided by annuities will require high charges Higher income and higher charges will exhaust the fund
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US 5% GUARANTEED FOR LIFE MINIMUM WITHDRAWALS & UK FLEXIBLE LIFETIME MONEY- BACK ANNUITY
£0 £1,000 £2,000 £3,000 £4,000 £5,000 £6,000 £7,000 £8,000 £9,000 $10,000 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 103 105 107 109 £0 £20,000 £40,000 £60,000 £80,000 £100,000 $120,000 US 5% For Life Flexible Lifetime MB Annuity US Death Benefit FLA death benefit
Income depends on investment performance. 50% floor provided by automatic switch to Guaranteed annuity Income Death Benefit
Source: Own calculations Male age 65 income taken yearly in arrears; US 6% p.a. growth rate & 0.6% p.a. Living Benefit charge; UK 6% growth to age 90, 4% thereafter & 100% PMA92 (U2003)
Comparison between US Variable Annuity GMWB and UK flexible lifetime money-back annuity
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The risks of Income Drawdown …
Longevity risks
– Outliving capital or reduced income – Leaving unintended bequests – Failure to leave intended bequests
Investment risks
– Under performance – Taking income when market are depressed – Yields at fixed annuity purchase date
Mortality drag and Mortality improvement risk Advice and Servicing costs
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Annuities have a central role as part of any holistic retirement income plan Annuitisation is the most effective and efficient way
- f maximising lifetime income
There may be a role for more drawdown as a prelude to annuitisation Money-back annuities can improve the mass market proposition Drawdown will NOT eventually replace annuities The motion should be defeated
In Summary …
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