Compulsory and Voluntary Annuities Markets in the UK

63 Pages Posted: 24 Jan 2010

See all articles by E. S. Cannon

E. S. Cannon

University of Bristol - Department of Economics

Ian Tonks

University of Bristol

Date Written: January 1, 2010


This paper describes the operation of both the compulsory pension annuity and voluntary annuity markets in the UK. The paper reports on the movement of UK annuity price quotes in the voluntary market from 1957-2009, and in the pension annuity market from 1994 to 2009, and examines whether annuities were fairly priced over this period. The paper computes the money’s worth of annuities, and finds that on average the money’s worth in the voluntary market over the sample period for 65-year old males has been a very high 98%. In the larger compulsory pension annuity over a shorter sample period we estimate that the money’s worth for 65-year old males has been 89%, and for 65-year old females has been a similar but slightly larger 90%. Taking into account load factors associated with annuity contracts and in comparison with other financial and insurance products this implies that annuities are fairly priced. However the value of the money’s worth is sensitive to the assumptions made about life expectancy, and we explain the assumptions made about the appropriate life tables to apply to annuitants in these annuity markets. There is some evidence that money’s worth has fallen since 2002. We discuss a number of factors that could have effected the fall in money’s worth, including: changes in insurance regulation; changes in industrial concentration; an insurance cycle; pricing of mortality uncertainty and the growth in the impaired lives market.

Keywords: Annuities, annuity markets, pension replacement ratio

JEL Classification: E62, G14, H55

Suggested Citation

Cannon, Edmund Stuart and Tonks, Ian, Compulsory and Voluntary Annuities Markets in the UK (January 1, 2010). Available at SSRN: or

Edmund Stuart Cannon (Contact Author)

University of Bristol - Department of Economics ( email )

Senate House
Tyndall Avenue
Bristol BS8 ITH
United Kingdom

Ian Tonks

University of Bristol ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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