AnnuityValue Calculation Methods
Standard Method
The Standard Method
of calculating annuities utilizes a constant interest rate for all payments in
all years. Segmented interest periods
are not considered.
Example
– Standard Method
Mortality – GAM 71 Male
Interest – 4.0%
Current Age – 50
Benefit Payment - $100 at age 65
Present Value = |
l65 * |
1 * |
$100 |
|
|
l50 |
(1.04) 15 |
|
|
= |
.848532 * |
.555265 * |
$100 |
|
= |
$47.12 |
|
|
The Select and Ultimate Method calculates annuity payments
by discounting at the designated interest rate over each segmented period.
Example
– Select and Ultimate Method
Mortality – GAM 71 Male
Period 1: Period 5
Years, Interest – 4.0%
Period 2: Period 7
Years, Interest – 5.0%
Period 3: Period 113
Years, Interest – 6.0%
Current Age – 50
Benefit Payment - $100 at age 65
Present Value = |
l65 * |
1 * |
1 * |
1 * |
$100 |
|
|
l50 |
(1.04) 5 |
(1.05) 7 |
(1.06) 3 |
|
|
= |
.848532 * |
.821927 * |
.710681 * |
.839619 * |
$100 |
|
= |
$41.62 |
|
|
|
|
The Pension Protection Act Method calculates annuity payments
by discounting over ALL years using the interest rate for which the payment is
made during a segmented period.
Example
– Pension Protection Act Method
Mortality – GAM 71 Male
Period 1: Period 5
Years, Interest – 4.0%
Period 2: Period 7
Years, Interest – 5.0%
Period 3: Period 113
Years, Interest – 6.0%
Current Age – 50
Benefit Payment - $100 at age 65
Present Value = |
l65 * |
1 * |
1 * |
1 * |
$100 |
|
|
l50 |
(1.06) 5 |
(1.06) 7 |
(1.06) 3 |
|
|
= |
.848532 * |
.747258 * |
.665057 * |
.839619 * |
$100 |
|
= |
$35.41 |
|
|
|
|