时间:2014-10-28 15:33作者:By Lars Kroijer
Annuities are an important and sometimes dominant part of an investment portfolio for millions of savers. Although in certain instances there is a requirement for pension scheme participants to put a part of their pension savings into an annuity, others decide to invest in them because they find great comfort in having a secured cash flow until they die (some annuities continue payments for dependents).
I certainly don’t have a problem with annuities. There is great intangible value in knowing that you are going to be okay in your old age, regardless of how old you get. If you have an annuity that is adjusted for inflation (some adjust for changes in the retail price index), you have a very good picture of your spending power in retirement without worrying about the oscillations of the markets or dying with a lot of money that you may have no use for (obviously, because you will be dead).
Also, remember that a lot can change between now and retirement. Annuitants are expecting payments many years into the future. If you buy an annuity at age 50, with some luck you will be looking for a payment 25 years into the future, and at that time, your quality of life may greatly depend on actually receiving that payment.
In many cases, annuity providers are insured by a government-backed scheme, but you should make absolutely sure that is the case. You certainly don’t want to be in a situation where a Lehman-style bankruptcy means that you are left with nothing in retirement when your earning potential has greatly diminished (keep in mind that annuity providers are likely to be struggling exactly when markets are tough and you probably need the annuity the most).
How Do You Figure Out How Much They Cost?
With an annuity, you are essentially lending money to the insurance company for a very long time. You can try to figure out the rate you can expect for a standard (non-inflation-adjusted) annuity by doing the following:
As an example, when I did the above exercise as a potential annuitant, the IRR I received on my investment was slightly lower than the equivalent UK government bond. So, I essentially would be lending money to the annuity provider decades into the future at a lower rate than I would get from the UK government. Also, remember that I would be giving up the flexibility I would have to trade the UK government bonds if my circumstances changed. In other words, the insurance I received from the annuity provider against running out of money in my old age was very costly.
Are They Worth It?
It is not surprising that the IRR for an annuity is not great. Annuity products are expensive to manage and not necessarily great business for the insurance companies because they have to deal with the administration of cash transfers to thousands of annuitants in addition to marketing, overhead, re-insurance on the insurer’s credit, and their profit and capital requirements.
Consider that it costs money every time someone calls up to complain that they have not received their £300 and multiply that by a million customers. Even if you are not the costly customer, you share in paying for those costs by being on the same annuity platform.
My conclusion on annuities is that they are well worth the poor return they promise for investors without a lot of savings and who worry about having enough money through old age. If you don’t have a lot, there is great value in knowing exactly what you do have and that it will be enough. An annuity can give you that.
Investors with more assets who are highly likely to leave an estate should perhaps reconsider annuities. After adjusting for potential tax or other benefits, the return on the assets you put into an annuity is quite poor and you could make more money investing on your own. You will, of course, not have the guarantee of additional payments if you live beyond your life expectancy, but considering your other assets, you will be fine even without the additional money. Also, annuity providers make a lot of money on the hefty penalties they charge for changing or cancelling annuities; if there is any chance that you may do so, consider that when evaluating an annuity; a lot can change decades ahead, so even if you consider cancellation unlikely now, that may change in the future. This situation could even include if you want out because you no longer consider the future annuity payments secure.
As evidenced by the IRR on an annuity, the return profile is extremely low risk/low return, and that may not suit your risk profile. If you can afford greater risk in pursuit of greater returns in your portfolio, an annuity may lock you into lower return expectations for decades ahead.
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