Blue Chip Issue 89

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