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Annuitization and alternatives

Annuitization and alternatives. Martin Lunnon Government Actuary’s Department, UK Wednesday 3 July 2002 14:30 – 17:30.

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Annuitization and alternatives

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  1. Annuitization and alternatives Martin Lunnon Government Actuary’s Department, UK Wednesday 3 July 2002 14:30 – 17:30

  2. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Increasing prevalence of DC accounts • occupational pensions • voluntary supplement to other provision • replacing part or all of social security pensions Focus on • at first, build up of funds • soon, how to turn funds into pension income Martin Lunnon, Government Actuary's Department, UK

  3. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Traditional (immediate) annuities (payout annuities) provide • insurance against longevity • pooling of risks within cohort • protection for cohort against longevity improvement • investment guarantees Risks passed to annuity provider! Martin Lunnon, Government Actuary's Department, UK

  4. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Aim of pensions policy? • reduce poverty amongst older people • (possibly) provide capital for investment in financial markets One approach – (voluntary) savings with tax advantages Such tax advantages • expensive • regressive Martin Lunnon, Government Actuary's Department, UK

  5. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Possible reasons for saving • retirement income • bequest motive • precautionary (esp. care, medical expenses) • discretionary expenditure before, at, or during retirement If limit tax advantages to first heading, can • reduce costs, • while still meeting government’s main aim Martin Lunnon, Government Actuary's Department, UK

  6. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Aims of policy in relation to using DC pension accounts? • ensure security of income throughout retirement • ensure that tax-advantaged saving is actually used for retirement income Other considerations? • efficiency of asset allocation (especially if desire to stimulate capital markets) • administrative ease for pensioners Martin Lunnon, Government Actuary's Department, UK

  7. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives “Problems” with annuities? • “expensive” (in the UK, at least) • all the money in government bonds • when you die, money “goes to the insurance company” • don’t protect against inflation • annuity provider may go bankrupt • annuity providers don’t actually like them (guarantees) • discriminate against the sick and poor (who die sooner), and against women (who pay more) Martin Lunnon, Government Actuary's Department, UK

  8. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Solution – new annuity products and alternatives to annuities • index-linked (inflation-proofed) annuities • investment-linked annuities (eg CREF annuities) • enhanced annuities for those with impaired lives • “repackaging” annuities • income drawdown (programmed withdrawal) • mixtures of the above Martin Lunnon, Government Actuary's Department, UK

  9. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Income drawdown (programmed withdrawals) Rate/limits • maximum, minimum, both, or fixed amount (no freedom to vary income) • how to set • how frequently to review • effect on investment • continuing need for advice on investment and on how much to draw Martin Lunnon, Government Actuary's Department, UK

  10. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Consider alternatives against criteria • secure income • investment freedom • discourage “over-saving” with tax privileges • simplicity for pensioners Traditional annuities Y N Y Y Investment-linked and “repackaged” annuities Y Y Y Y Drawdown N Y N N Martin Lunnon, Government Actuary's Department, UK

  11. International Social Security AssociationSeminar for Social Security Actuaries and Statisticians - Moscow, Russian Federation 3-5 July 2002Annuitization: Major issues - Annuitization and alternatives Around the world DC occupational arrangements: • if EET tax treatment, annuitisation generally compulsory (at least in part) • with different tax treatment, often greater freedom For personal plans, some favouring of annuitisation Martin Lunnon, Government Actuary's Department, UK

  12. Annuitization and alternatives Martin Lunnon Government Actuary’s Department, UK Wednesday 3 July 2002 14:30 – 17:30

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