The Value for Money of Annuities in the UK: Theory, Experience and Policy

Abstract

: The UK requires individuals with individual pension accounts to annuitize before the age of 75. Using a time series of annuity prices and quantities, we apply the methodology of Mitchell et. al. (1999) to examine the value of UK market annuity rates relative to theoretical values. We find that selection effects account for the majority -- perhaps one-half to two-thirds -- of the total annuity costs for the typical individual. The pure administrative cost loadings on UK annuities are relatively low. While our results are sensitive to mortality assumptions, the total financial losses for the typical worker from charges or market imperfections in the annuities market appear much lower than the costs at the pre-retirement stage as found by Murthi, Orszag, and Orszag (1999). Keywords: annuities, money's worth ratios, adverse selection JEL Classification Nos.: H55, G2, G22 This paper is part of a wider World Bank sponsored study on annuities markets throughout the world. Th...