The value of retail annuities

February 2021

As policymakers, financial services firms and individuals turn their attention to the decumulation phase of retirement saving, annuities are gaining renewed interest.


Major changes over the past 25 years could affect the value of annuities. The rise in life expectancy and decline in interest rates have increased the present value of a given stream of lifetime income. The gap in life expectancy by socioeconomic status has broadened, potentially reducing annuity payouts for the average person. Many insurers, reacting to these changes, have altered their annuity pricing strategies. This paper examines the value of lifetime income products in light of today’s environment.

Key Insights
The money’s worth of annuities—i.e., the ratio of expected lifetime benefits to cost—has remained stable over the past 30 years.
The money’s worth of indexed annuities is slightly lower than that of nominal annuities, while the money’s worth of deferred annuities is substantially lower.
The value of deferred annuities inclusive of their insurance value is greater than that of immediate annuities.
Large gaps by education and race exist in the money’s worth of immediate annuities due to large gaps in mortality.
In terms of wealth equivalence, values vary little by education, but Blacks tend to enjoy greater benefits than whites due to greater variance in life expectancy.

The researchers calculated the money’s worth of immediate nominal annuities, annuities with a fixed escalation rate, and deferred annuities that begin paying out at age 85. The purchaser was assumed to be 65 years old.