Annuity. Value or not?

A question about : Annuity. Value or not?

A 65 year old male can draw a single life annuity of Ј7391 for Ј100,000 and expect to live for another 16 years. At the current gilt yield of 5% the annuity provider would have Ј34,000 of the annuitants cash when he died (exluding costs of administration). This doen't seem like good value for the annuitant. Or am I missing something?

Cav

Best answers:

• You are forgetting cost of setup, profit, recovering the overpayment of annuities in the 80s/90s along with guaranteed annuities.
  Yield will not be the only consideration as there would need to be some protection for capital loss.
  Assuming compulsary purchase annuity and Non smoker, you can get Ј7483 on 100k. Probably a little more with a bit more research. A purchased life annuity would be a little more.
• Thanks for the reply but I did say that amount remaining after statistical age at death excluded admin costs. Would have thought that overpayment of those surviving the stats would be balanced by early deaths.
  Not sure about capital loss as I thought that gilts were paid in full on maturity.
  Even with factors mentioned it still looks a good deal for the provider, which is not surprising.
• Gilts only return capital if you bought them at the original issue price of a 100 and you hold them until maturity. In between that point gilts can be traded and can have a lower or higher price depending on the demand. The demand is affected by interest rates.
• Survival statistics are taken from standard mortality tables so the 16 years is realistic, but your calculation has answered my question. The annuitant should receive Ј9220/year but in fact receives only Ј7400 which puts the yearly costs at 20%.
  ???
  Cav