Blue Chip Issue 89

BLUE
CHIP
FINANCIAL PLANNING | Retirement
Annuities: choose wisely
Financial advisors have the critical challenge of helping their clients convert
retirement capital into an income stream to see them through their retirement years.
There are two main annuity income products (AIPs) that
financial advisors assist their clients to choose from,
namely: a guaranteed/life annuity (or annuitisation);
and a living annuity (or self-annuitisation). The former
guarantees an annuity income for life, whereas the latter
exposes capital to volatile investment returns, with the possible
danger of depletion before death, especially in the wake of
excessive withdrawals.
Contrary to the recommendation based on economic theory,
very few people avail themselves of the benefits that a guaranteed
annuity provides – instead most retirees prefer a living annuity, an
investment portfolio from which the annuitant withdraws income,
with the possibility of leaving heirs a bequest of the remaining
retirement capital at death.
The worldwide phenomenon of reticence among retirees to
protect themselves against longevity and investment risk is an
annuity puzzle that has been the subject of vigorous academic
debate and applies especially in the South African context.
A better understanding of the annuity puzzle is essential,
especially in the wake of longer life expectancies of retirees due
to medical innovation, unsustainable living annuity withdrawal
rates and poor investment performance delivered by the
JSE All Share Index (ALSI) from time to time.
Annuity decision-making factors
In my PhD research, I looked at the factors associated with annuity
decision-making. Specifically, the factors (grounded in annuity
puzzle literature) that relate to i) individuals’ annuity perceptions
and intention pre-retirement and ii) annuitant satisfaction levels
post-retirement, were investigated. The two parts of the study ran
concurrently with distinctive samples. I performed a quantitative
analysis on cross-sectional primary data collected by conducting
survey research using online questionnaires.
The sample for the first part of the study consisted of employees
of Stellenbosch University (SU) who are members of the University
of Stellenbosch Retirement Fund (USRF), and employees of Exxaro
who are members of the Exxaro Retirement Fund.
In part one of the study, 63% of the total sample (311
respondents) had chosen a living annuity and 37% had chosen
a guaranteed annuity. The ratio of respondents choosing a living
annuity over a guaranteed annuity of ≈1.73:1 is expected, as most
South Africans favour the living annuity option. The sample in
part two of the study consisted of former employees of SU, who
are fully retired from the USRF, and Glacier annuity clients. In
part two, 76% (229 respondents) out of the total sample of 303
respondents had chosen a living annuity, exactly as the
annuity puzzle predicts. The data from both samples
was collected in June 2020.
PHOTO: ANDREA PIACQUADIO
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