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Are annuities value for money?: who can afford them?

Lopes, Paula (2003) Are annuities value for money?: who can afford them? Discussion paper: UBS Pensions Series 019, 473. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This paper solves an empirically parameterized model of households’ optimal demand for nominal and inflation indexed annuities. The model incorporates mortality, inflation, and real interest rate risk. The model draws some interesting predictions. First, the welfare calculations on the access to annuities markets show that nominal annuities are welfare improving even when sold at the empirically parameterized cost, which is above fair value. Real annuities are welfare improving over nominal annuities when sold at a fair price, but when we incorporate the empirically parameterized annuity premium the gains become negative at all wealth levels. Second, the simulation of the model for the British population wealth distribution shows that an important explanation for the little interest in annuities comes from the fact that annuities are extremely expensive, compared with the total accumulated assets held by households. In other words many households can not afford even to enter the annuity market. The paper also compares the simulated annuity demand to the actual demands reported in the Family Resources Survey. For those individuals who buy annuities, the simulated demands are not very different from those observed in the survey.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2003 The Author
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 473
Date Deposited: 19 Aug 2009 10:05
URL: http://eprints.lse.ac.uk/24899/

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