A Briefing Document from the Actuarial Profession
Annuity – a stream of income payments from an insurance company in return for a
single up front premium
This document begins by explaining how annuities work. Once understood, the
concept is simple, but nevertheless it is often misunderstood, which gives rise to some
of the myths concerning annuities and the value they provide.
The document goes on to examine how the annuity market works, how insurers price
annuities and where they invest the funds.
The paper then examines some of the current issues in the annuity market, including
capital requirements, whether annuities offer fair value to consumers and the recent
European Commission proposal that all annuities should be priced on a gender-neutral
The paper concludes with a historical perspective, looking at how annuity rates have
reduced over time and the implications for pensioners and guaranteed annuity rates.
Annuities have seen considerable recent interest shown in them by politicians,
regulators, journalists and other commentators. They have a very important social
function to play in the provision of retirement income. Many people have saved
throughout their lifetime in a pension plan in order to provide an income after they
cease employment. An annuity enables the pensioner to enjoy the fruits of their
accumulated pension savings without the risk of running out of capital in old age.
How annuities work
At retirement, a pensioner may purchase an annuity from an insurance company.
In exchange for a single payment to the insurance company, the pensioner is promised
a regular income for the remainder of his or her life.
The level of the pensioner’s income is fixed at the commencement of the contract.
This can stipulate that each year’s income will be the same, or it can stipulate that
each year the income will rise by a fixed amount, or it can stipulate that each year the
income will rise in l