Tax review considers compulsory annuity plan

A FEDERAL Government scheme requiring retirees with modest superannuation nest eggs to ”buy” a pension would be the most efficient way of ensuring self-funded retirees do not run out of money during their old age, research for the Henry tax review says.

Modelling commissioned by the Henry panel found a $100,000 lump sum could ”buy” a single retiree a lifetime annuity or pension ranging from $5444 to $10,225 a year, depending several assumptions.

The University of NSW research found these pensions would be larger if they were provided by the Government rather than by the private sector and if retirees were required by law to invest a slice of their lump sums in a lifetime annuity.

As I understand from my days as a financial planner, the problem for companies providing lifetime annuities is that the only people who consder buying them are those who expect to live a very long time. The actuaries have to work out how much the company needs to charge for then, to ensure that the company can fulfil its obligation to make the contracted payments for life. They can’t, however, use normal life expectancy tables as only people who believe that they have a higher than average life expectancy are interested in buying the annuities. As a result, annuities tend to be very expectancy. This reduces the pool of potential buyers even more.    

This is the reverse of the normal problem for life insurance companies. For annuities,they would, of the face of it, rather have more unhealthy customers and less healthy ones.

The UNSW researchers appear to be trying to reduce the price of annuities by using compulsion to everyone covered.