Lifetime annuities fill breach left by guaranteed withdrawal benefits

By Alain Thériault | January 18 2013 10:04PM

As insurers cut back on the attractive features of guaranteed withdrawal benefit products, another product category is filling the void. Baby boomers looking for retirement income security are taking an increased interest in lifetime annuities, which often yield better returns than GWBs.

The ranks of guaranteed withdrawal benefit (GWB) suppliers has shrunk from 11 to 5 in one year. The market lost even more of its shine in 2012 when all the remaining players lowered their GWB at age 65 to the 4% range.

The lifetime annuity market is being buoyed by this trend. The baby boomer wave is another strong growth engine. Expected to enjoy unprecedented longevity, boomers now worry about outliving their savings. All the conditions are in place to make lifetime annuities the star product of the next 25 years, says Alex Melvin, president of CANNEX, a company that offers advisors an annuity rating system.

Mr. Melvin says that advisors must consider the payout option more than ever. “According to last year’s Canadian census, there are more people ages 55 to 64 than people ages 15 to 24. 5,800 people are over the age of 100 and 250,000 over the age of 90.” Citing Earl Bederman, president of Investor Economics, he said that by 2020, almost half the households in Canada will have one member age 55 or older. Canadians’ longevity is another significant factor, he continues. “People aged 65 have a 50% chance of living until 94 and a 10% chance of living until 104,” he says.

These massive trends are stoking the public and advisors’ interest in lifetime annuities, Mr. Melvin points out. So much so that these products are becoming as popular as registered retirement income funds (RRIFs). Quoting figures from the Canadian Life and Health Insurance Association (CLHIA), Mr. Melvin says that in 2011, Canadians spent $1.57 billion on payout annuities and $1.59 billion on RRIFs. “It’s almost 50-50. We are at the beginning of a wave,” he adds.

This wave shows no sign of flagging. “Annuities are making sort of a comeback. The best time to buy an annuity is probably in your seventies, and you get that bubble of people between 55 and 64 years that ten years from now will be in that sweet spot,” Mr. Melvin points out.
Better returns

Do low long-term interest rates eat into lifetime annuities as much as they threaten competitive products? “They do and they will,” he says. Sales figures published by the CLHIA in 2011 are lower than those of 2010, for both annuities and RRIFS, he points out. “According to CLHIA stats, [annuities] are down 10% between 2010 and 2011. With the interest so low, people are kind of waiting to see if rates will get higher soon,” he says.

Lifetime annuities, however, are not based on interest rates alone, Mr. Melvin explains. “The payout of an annuity is a combination of return of premium, mortality credits and interest rates. Interest is a big component of the total payout, but with time, mortality credits get more of those payments.”

Insurers’ annuity portfolios cover a group of people whose “longevity risk” is determined according to mortality tables in force. “Those who survive draw from those who don’t survive,” Mr. Melvin explains.

Another argument in favour of lifetime annuity sales: this product can often offer higher payments than GWBs, especially for pensioners ages 65 and up. According to Mr. Melvin, an annuity product equivalent to the average GWB can offer payments of 6.2% to an investor age 65, and even more at higher ages.

Dabbling in the CANNEX rating system quickly turns up some bargains. A male age 65 who buys a $250,000 annuity with no guarantee period can receive a monthly payment of $1439.94 from Canada Life, which corresponds to an annual amount of $17,279.28, or an annual return of 6.9% if interest is capitalized once a year and the principal remains intact for life.

A woman under the same conditions would receive $1273.54 per month with a Manulife Investments annuity. This corresponds to an annual return of 6.1%.

Niche players

Great-West (including Canada Life), Manulife and Sun Life Financial, are the main market players, Mr. Melvin says, adding that niche players also stand out. During our research, the names Empire Life, BMO Life Insurance, Desjardins Financial Security, Equitable Life and Standard Life popped up frequently among the insurers offering the highest annuity payments. For example, Equitable Life ranked first for women age 65, for a $250,000 annuity with a 10-year guarantee period. It offers a monthly payment of $1249.71, for an equivalent annual return of 6%.


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