How annuities turn consumers off guarantees


Using the word “annuity” can put consumers off guaranteed income products, a research paper published by the FCA suggests.

More than 900 consumers were given the hypothetical choice between retirement options including buying an annuity, self-annuitising, or spending the money until it ran out.

When the word “annuity” was not used, 66 per cent of consumers favoured the cashflows provided by the annuity over those provided by the savings account option. When the term “annuity” featured, only half of the consumers expressed a preference for the annuity – a drop of 16 percentage points.

The researchers say: “In principle, how the income streams associated with different options are presented should not affect the consumer’s decision – the actual income stream is unaffected by the wording. However, in practice we know that the framing of options does affect consumer decisions, and in predictable ways.”

“Consumers seem to associate the term ‘annuity’ with poor value products. The use of the term ‘annuity’ reduces the number of consumers who choose the annuity, even though consumers appear to value the underlying characteristics of the annuity.”

The researchers also divided the retirement options to frame some in terms of consumption, how much money the consumer could spend, or investment, what the return on their investment would be.

Framing annuities in the context of investment returns also biased consumers against annuities.


The researchers say: “Currently, consumers are provided with the value of their pot continually during accrual and at the point of retirement. This may create an investment frame through which consumers view annuities. While there are very good reasons why consumers should be given this information, it does appear to lead to consumer aversion to annuities.

“Such a finding means that it is vital that consumers get the right information and help at the time of retirement to ensure they make the best decision they can about their retirement income.