A 'Semi-Historical' Time Series of UK Annuity Rates for Retirement Income Backtesting

In this paper, a time series of UK annuity income rates (AR) based on historical interest rates but modern mortality rates (hence the term “semi-historical”) has been derived for both nominal and inflation-linked annuities. The errors associated with the calculated rates for nominal annuities are approximately 10% of AR, while those for inflation-linked annuities are likely to be higher at 15% of AR. The results of a historical backtest for a relatively straightforward case where a retiree purchased a single life level annuity at retirement age with half of their available assets indicate that this provides a boost in income for 15 years or more in virtually all historical retirements at the expense of a reduced legacy until more than 25 years after retirement