Skip to main content
Article thumbnail
Location of Repository

Are annuities value for money?: who can afford them?

By Paula Lopes

Abstract

This paper solves an empirically parameterized model of households’ optimal demand for nominal and inflation indexed annuities. The model incorporates mortality, inflation, and real interest rate risk. The model draws some interesting predictions. First, the welfare calculations on the access to annuities markets show that nominal annuities are welfare improving even when sold at the empirically parameterized cost, which is above fair value. Real annuities are welfare improving over nominal annuities when sold at a fair price, but when we incorporate the empirically parameterized annuity premium the gains become negative at all wealth levels. Second, the simulation of the model for the British population wealth distribution shows that an important explanation for the little interest in annuities comes from the fact that annuities are extremely expensive, compared with the total accumulated assets held by households. In other words many households can not afford even to enter the annuity market. The paper also compares the simulated annuity demand to the actual demands reported in the Family Resources Survey. For those individuals who buy annuities, the simulated demands are not very different from those observed in the survey

Topics: HG Finance, HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2003
OAI identifier: oai:eprints.lse.ac.uk:24899
Provided by: LSE Research Online

Suggested articles

Citations

  1. (1999). Annuities Markets in Comparative Perspective: Do Consumers Get Their Money’s Worth?”, Working Paper,W o r l d Bank, doi
  2. (2002). Annuity Prices, Money’s Worth and Replacement Ratios: doi
  3. (2000). Differential Mortality and Wealth Accumulation”, doi
  4. (2002). Household Risk Management and Optimal Mortgage Choice”, working paper,H a r v a r dU n i v e r s i t y . doi
  5. (1991). How Strong are Bequest Motives? Evidence Based on Estimates of Demand for Life Insurance and Annuities”, doi
  6. (1996). Individual Financial Decisions in Retirement Savings Plans and the Provision of Resources for Retirement”, doi
  7. Jeffrey R.,1999 (a), “Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequest,”, doi
  8. Jeffrey R.,1999 (b), “Private Pensions, Mortality Risk, and the Decision to Annuitize”, doi
  9. (2000). Joint Life Annuities and Annuity Demand by Married Couples”, doi
  10. (1996). Modelling the Conditional Distribution of Interest Rates as a Regime-Switching Process”, doi
  11. (2002). Optimal Asset Allocation and the Real Option to Delay Annuitization: It’s Not Now or Never,” Discussion Paper, Birbeck College,
  12. (1991). Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models”, doi
  13. (1999). Selection Effects in the Market for Individual Annuities: New Evidence from the U.K.”, NBER Working Paper 7168. doi
  14. (1990). The Cost of Annuities: Implications for Saving Behavior and Bequests, doi
  15. (1997). The Econometrics of Financial Markets, doi
  16. (1993). The Inefficiency of Private Constant Annuities, doi
  17. (1999). Value for Money of Annuities in the UK: Theory, Experience and Policy,” Working Paper,B i r b e c k College,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.