A modern tontine reduces the chance of outliving your pension savings. In a modern tontine, a group of people become the beneficiaries of each other. This mechanism provides the survivors with more money, enabling them to have a pension income for longer. Which is how, fundamentally, a life annuity works! The difference is that the life annuity guarantees the payment for life whereas the modern tontine aims, but does not guarantee, to pay you an income for life.
Modern tontines are not about betting on who lives or dies in the group. The last survivor does not take all – instead, the money released by earlier deaths are shared out as they occur among the group. There should be no massive pension pot left to the “last survivor”.
Modern tontines should be structured so that tontine members have a stable income for as long as possible: ideally, for as long as they live. They should not be structured to give an exponentially increasing income as members age.
Pooling pensioners’ resources. By C. Donnelly. The Actuary, August 2018.
Sample Microsoft Excel code for a perfect pool tontine (illustrative only)
Tontine illustration in Excel
Product options for enhanced retirement income.
By C. Donnelly and J. Young. British Actuarial Journal (2017), 22(3), pp636-656.
Actuarial fairness and solidarity in pooled annuity funds. (Preprint here.)
By C. Donnelly. ASTIN Bulletin (2015), 45(1), pp49-74.
Bringing cost transparency to the life annuity market. (Preprint here.)
By C. Donnelly, M. Guillén and J.P. Nielsen. Insurance: Mathematics and Economics (2014), 56, pp14-27.
DECUMULATION (i.e. CONVERTING PENSION WEALTH INTO A RETIREMENT INCOME)
Deciding how to invest your pension savings in retirement and how much to withdraw as an income each year is a problem faced by increasing numbers of people. Balancing the need to withdraw a reasonable income to live on while avoiding running out of money is a hard problem, particularly if you rely only on investment returns.
Approaches to this problem are examined in the State-of-the-Art Report below. Longevity protection strategies are also included.
1. Pension decumulation strategies: a State-of-the-Art Report
By T. Bernhardt and C. Donnelly.
Here, the focus is on how to distribute investment returns among a (possibly changing) group over time. The motivation for investment risk-sharing may be to give greater certainty about each group member’s returns, and/or to reduce investment risk.
Both theoretical and applied approaches to investment risk-sharing are explored in the State-of-the-Art Report below.
2. Investment risk-sharing: a State-of-the-Art Report
By R. Chehab and C. Donnelly.