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Britannic warning on annuity transfers

Britannic Retirement Solutions is predicting that the removal of mortality cross-subsidy from annuities would need returns to increase by between 1 per cent and 4.4 per cent.

Research from BRS illustrates that if the Government allows transferability between annuity providers, they face cutting £11,000 off the lifetime income of the average male age 65. The provider argues that when the mortality cross-subsidy is removed, the returns required to meet the required income soar.

For example, for a 75-year-old male with an annuity premium of £40,000 and an annual income of £4,394, the mortality cross-subsidy is worth £1,032. If the cross-subsidy was undermined, the annuity pot would need to generate an additional 4.39 per cent return.

In this scenario, the return needed to match income for life would be 10.14 per cent, which would demand a higher risk investment strategy than would normally be desirable.

In another example, a fem-ale aged 75 with a premium of £40,000 and an annuity income of £3,898 benefits to the tune of £511.36 a year from the mortality cross-subsidy. The policyholder would have to count an additional return of 3.85 per cent to match this.

Corporate development director Bob Bullivant says: “The perception of poor value of annuities is based on a combination of a failure to understand the length of our life exp-ectancies and is fuelled by unrealistic expected investment returns driven by experience in the 1980s and 1990s.”

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