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Why clients need to overcome annuity aversion

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Retirees often say they want their pension fund to provide a guaranteed income that will last for their lifetime. They just don’t want an annuity. Anyone watching consumers engage with the retirement market in recent years will be well aware of this glaring paradox.

Money Marketing recently highlighted FCA research showing that just using the word “annuity” turns people off. Two-thirds of people in the FCA’s survey favoured the retirement cashflows produced by a guaranteed income plan compared to a savings account option when no product names were mentioned. However, among those told that the cashflows came from something called an “annuity” there was a sharp fall in preference for the annuity of 16 percentage points.

The paper suggested that declining annuity returns, due to falling interest rates and increased longevity, could have led consumers to developing an aversion to the word annuity. Certainly, negative media coverage focusing on the price rather than the value of an annuity hasn’t helped.

“Consumers’ choices may consequently be affected by this term even though consumers would actually prefer the characteristics of annuities when compared to alternative strategies,” the research concludes.

Why is this important? There’s a whole host of behavioural biases that need to be overcome to help retirees towards better outcomes. As an industry we need to make sure that the advice we give, the products we sell, and the framing of our communications challenges those biases and meet the needs and expectations of those customers.

I’m often asked which is best – drawdown or an annuity? To me, that’s a bit like somebody asking if they should have an Isa or house insurance.

Overcoming the annuities aversion

The success of the 2015 pension reforms relies on people making sensible decisions about how best to deploy pension assets over the long-term. To do that requires a realistic grasp of a range of factors such as life expectancy, investment risk, inflation and taxation. Recognising the onerous responsibility it was putting on people who may not be best equipped to make long-term decisions, the Government created Pension Wise. To overcome worryingly low uptake so far, there is mounting pressure for it to be made the default option for all those accessing pension cash.

Much like the aversion to “annuities” I am baffled by the number of people who say that they find pensions complex and opaque yet refuse to take free impartial guidance from Pension Wise put in place by the UK government to help navigate through what they often described as a maze or a minefield. A weakness they see in guidance is that while it provides useful information, it does not tell them what is best for them. They could, of course, address that by seeking professional advice but that’s not happening in most cases.

Just as professional investors consider the “risk-free” rate when deciding where to allocate capital, retirees should be made aware of how much guaranteed income their fund could generate for them – a personalised rather than a standard rate – in order to use the figure as a key benchmark against which to consider alternative options. And that should apply not just at retirement but at regular points for those in drawdown who may need an exit strategy to protect against outliving assets.

I’m often asked which is best – drawdown or an annuity? To me, that’s a bit like somebody asking if they should have an Isa or house insurance. You can afford not to have an Isa but not many homeowners would risk not buying house insurance.

The truth is that many retirees “don’t know what they don’t know” and we have a responsibility to tell them. That doesn’t mean parroting what they want to hear but properly challenging their preconceptions.

Stephen Lowe is group communications director at Just Retirement

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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 […]

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Hi Stephen,
    Good article – we did some research around this – what constitutes value for money from a customer perspective – http://www.grantthornton.co.uk/en/insights/pensions–at-retirement–will-i-die-poor/ and agree with your thinking.
    Cheers
    Sandy

  2. You are so very right. The question I put was even simpler: “Would you like a guranteed income which will be paid for as long you (and your wife) live or would you prefer to invest in the stockmarket”. When they indicated the former I asked if they were absolutely sure and when they said ‘yes’ I told them that what they would get would be an annuity. Noone opted for the sytockmarket option, althogh a significant number wisely decided to defer taking benefits until they got older.

    Apart from the negative press coverage (where they influenced by provider advertising spend?) the Treasury under Osborne has to shoulder a very large part of the blame. They know full well that many would ‘trash the cash’ ansd swell the tax coffers in the short term.

  3. Not sure the analogy of having to invest in the stockmarket is a requirement for drawdown. It seems a shock statement to allow only the “adventurous” to access drawdown without even assessing what the required yield would be to keep in touch with an annuity. I would prefer to ask the client if they wanted their income from a scheme that carried the risk that it could run out of funds before they run out of breath !

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