Why SPIAs are a Good Deal Despite Low Rates

Single-premium immediate annuities (SPIAs) have been out of favor in the current low-interest-rate environment. But my new research indicates that SPIAs still offer especially attractive opportunities for retirees. One of the key reasons is that typical advisor clients will, on average, live longer than the overall population.


Sometimes research in one area leads to findings in another, and this was the case in this investigation. I've recently been researching the retirement system in the U.K., where I live part of the year. This system is undergoing major changes, including the removal of rules requiring that accumulated retirement savings be turned into annuities. Part of my research involved comparing SPIA pricing in the U.K. and U.S., which yielded the surprising result that SPIAs are much more attractively priced in the U.S. Payout rates here for comparable products are 12% to 17% higher.

There is no obvious reason for the differences. Government bond rates are virtually the same in the U.S. and U.K., and there is no reason to expect that annuity purchasers in the U.K. will live significantly longer than their U.S. counterparts. An email exchange with U.K. actuary David Blake, director of the Pensions Institute at the Cass Business School, indicated that pricing differences might be due to more stringent capital requirements for British insurers, better opportunities for U.S. companies to earn attractive credit spreads, U.S. insurers not being as up-to-date with longevity estimates and different competitive environments because of forced annuitization in the U.K.

Regardless, the U.S. buyer is getting a much better deal than the U.K. buyer. I wanted to investigate whether U.K. buyers are getting a bad deal or U.S. buyers are getting an especially good deal.

Mortality assumptions

To evaluate pricing from a buyer's perspective, I needed to make assumptions about mortality rates. Annuity purchasers in the U.S. tend to be more upscale than the general population, and annuity buyers are typically healthier. Both those factors increase expected longevity. The Society of Actuaries (SOA) gathers mortality data for annuity buyers from the insurers who sell these products and publishes both mortality tables based on this data, and recommended mortality improvement scales for projecting future mortality.