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Who says smoking pays when it comes to annuities?

A colleague reminded me today that saving money was the second most popular new year’s resolution in 2013. Good news for advisers who can help clients save (or make) money.

Apparently, traditional resolutions are losing popularity. Case in point: quitting smoking was only the 26th most popular resolution last year.

My wife gave up smoking recently. I commend her willpower, even if we have acquired a long list of new swear words. Her reformed-smoker status awakened the actuarial side of my brain, too. Out came pen, paper and scientific calculator to assess the economics of the situation.

Quit for quids?

On one hand, she’s saving £8.50 per day on a pack of 20. She’s 32, so if she retires at 60 that’s approximately 10,227 smoke-free days, which adds up to a saving of nearly £87,000.

On the other hand, she’ll get a lower annuity rate as a non-smoker. A healthy 60-year-old female non-smoker gets around £2,100 a year from a £40,000 pension pot. If she smoked, she’d get around 5% more. But is that enough to cancel out that £87,000 saving?

My ‘simple’ maths says ‘no’. My smoke-free wife will only be worse off if she saves more than £1.75m into a pension – well over the lifetime allowance. Unfortunately, she’s a way off this.

Three key take-outs

1. Smoking is expensive. According to my maths, it equates to a pension of over £4,000 a year.

2. Comparing the average pension saving of around £50,000 to the cost of smoking is a sad reflection of our attitude to pension saving.

3. I’m very, very proud of my wife!

And just like that, I’ve disproved the theory that buying an annuity is the only time smoking pays – in my wife’s case at least. As if clients needed more financial reasons to quit in 2014.

N.B. For the purposes of simplicity, my calculations ignore any complications of interest, inflation and tax relief. But, believe me, I burned two sides of A4 with the full calculations.

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