Shop around for the best annuity, customers are being told. But it seems few people explain how to shop properly. By this I mean the natural customer behaviour when it comes to shopping is to look for a bargain and get the best price. This might be an effective strategy if you are shopping for a flatscreen TV but not necessarily when it comes to buying an annuity.
One of my missions in life is to show people how to shop for annuities properly and I am finding this increasingly difficult in a world where customers do not seem to recognise the importance of doing things properly. They may think they are doing it properly but because they “don’t know what they don’t know”, they do not understand the proper way to shop.
One of the ways of putting this right is to use some behavioural techniques which I call the “annuity nudge”.
The nudge factor has been well developed in politics and essentially argues that most people do not make rational decisions because their thinking and analysis is influenced by behavioural traits that limit their ability to make the best decisions for themselves. Therefore, it is legitimate for public policy to attempt to nudge people towards behaviour that will result in better outcomes for the individual.
’Theory says we should make it easier to get the porridge and put the doughnut in a less prominent position’
Take a simple example. At breakfast, do I go for the coffee and doughnut or do I go for the healthy porridge option. The rational part of me says that the porridge is best because it is will fuel me up for the rest of the day but the emotional side says the doughnut is the tastier and easier option even though I know that the benefits from the sugar burst will soon wear off. Classic nudge theory says that we should make it easier to get the porridge option and put the doughnut in a less prominent position.
My experience in advising clients about their annuity options suggests that there is an opportunity to use some nudge techniques to encourage clients to make better decisions at retirement.
It is not about trying to sell customers inappropriate policies or encouraging clients to take more risk than is good for them. This is the outcome of an overzealous sales process.
The annuity nudge is about encouraging customers and their advisers to understand the key issues and work through a logical but simple decision-making process with the aim of obtaining the best outcome for their personal circumstances.
What are these annuity nudges, you may ask? You will have to wait until next month to find out.