Blue Chip Issue 89
Blue Chip Journal – The official publication of FPI. Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.
Blue Chip Journal – The official publication of FPI. Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.
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FINANCIAL PLANNING | Retirement<br />
BLUE<br />
CHIP<br />
A discussion of how some of the annuity decision-making factors<br />
interrelate brings us to the main conclusions of the study.<br />
1. Managing retirement capital – burden rather than blessing<br />
The most unexpected finding from the research was that the<br />
desirability for flexibility and control over retirement capital to<br />
pursue capital growth significantly contributed to discontent.<br />
Paradoxically, the attributes that initially positively related to<br />
the favourability of a living annuity can often be associated with<br />
dissatisfaction in retirement. In other words, respondents (preretirement)<br />
with investor confidence and a desire for flexibility/<br />
control and accessibility find self-annuitisation beneficial.<br />
However, when another group of respondents were asked<br />
about the responsibilities that come with self-annuitisation<br />
in their retirement, these factors that were desirable before<br />
retirement, became a burden. Deductively, this finding challenges<br />
the accepted belief in Western culture that more control,<br />
choices, flexibility and autonomy lead to a better outcome or an<br />
improvement in well-being.<br />
The flexibility and control of managing a living annuity and<br />
earning an above-average return shift the responsibility and<br />
burden of not making suboptimal decisions to the annuitant,<br />
whereas a guaranteed annuity runs automatically and requires<br />
no further decision-making, once the initial irreversible decision<br />
of exchanging a capital lump sum for a consistent income stream<br />
of payments has been made.<br />
The belief of “doing better” with a living annuity (as opposed to<br />
a guaranteed annuity) could be attributed to investors looking<br />
at the annuity choice through the investment lens/frame,<br />
by focusing on the return and risk features of an AIP, without<br />
considering the consequences for consumption.<br />
Very few people avail themselves<br />
of the benefits that a guaranteed<br />
annuity provides – instead most<br />
retirees prefer a living annuity.<br />
The attractive feature of self-annuitising under the investment<br />
lens/frame is the possibility of generating superior investment<br />
returns, whereas the unattractive feature of annuitisation through<br />
the investment lens/frame is the potential to lose money in the<br />
event of premature death. The unattractive feature of a living<br />
annuity under the consumption frame is the possibility of outliving<br />
retirement capital. However, under the consumption frame, a<br />
guaranteed annuity is attractive, as it serves as a form of insurance<br />
for consumption throughout retirement.<br />
Annuity characteristics should be viewed through both lenses/<br />
frames to enable retirees to have a more balanced outlook on<br />
annuity decision-making. Retirees should be made aware that<br />
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