UK - The government's proposals to allow a series of temporary annuities to be purchased up to the age of 75 will extend the flexibilities offered by those products into the middle market, according to Watson Wyatt.
A series of temporary annuities would allow the balance of funds to be invested more freely and to be returned on early death.
Watson Wyatt said that if annuity providers issue more annuities at older ages, the margins built into their calculations to allow for future uncertainty of lifespan should be less and it will be easier for them to find bond investments of suitable term to match their annuity promises.
The changes might improve the yields assumed to calculate annuities by perhaps 0.5% per annum given the current shape of the yield curve for UK government stock and other bonds.
Mike Wadsworth, partner at Watson Wyatt, said: The CAT standards could be applied to investment linked annuities. I think that the ending of polarisation will facilitate the development of ‘annuity supermarkets’ and some organisations have publicly expressed interest in developing such services [AA, HBOS].
I have concerns about the ability of annuitants to transfer funds after the age of 75, when a lifetime annuity has been purchased. Lives in poor health may then simply switch to annuities providing a greater element of death benefit, selecting against the annuity pool they have left behind and thereby increasing the average lifespan of this pool.
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