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

40 Pages Posted: 7 Mar 2012

See all articles by Mamta Murthi

Mamta Murthi

World Bank

J. Michael Orszag

Willis Towers Watson - Reigate (Surrey Office); Institute for the Study of Labor (IZA)

Peter R. Orszag

Lazard Asset Management

Date Written: October 1, 1999

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: H55, G2, G22

Suggested Citation

Murthi, Mamta and Orszag, J. Michael and Orszag, Peter R., The Value for Money of Annuities in the UK: Theory, Experience and Policy (October 1, 1999). Journal of Pensions Management, May 2000. Available at SSRN: https://ssrn.com/abstract=2017864

Mamta Murthi

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

J. Michael Orszag (Contact Author)

Willis Towers Watson - Reigate (Surrey Office) ( email )

Watson House
London Road
Reigate, Surrey, RH2 9PQ
United Kingdom
+44 1737 241144 (Phone)
+44 1737 241496 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Peter R. Orszag

Lazard Asset Management ( email )

30 Rockefeller Plaza
New York, NY 10112
United States

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