I’ve been reading a short report by Demos for Legal and General. L&G provide annuities and want to understand the fall in the numbers of annuities purchased.
The retirement riddle is that the choices people are taken since the pension freedoms of 2014 aren’t making them happy, well or putting them in control.
I have to say I found some of Demos’ analysis baffling. It included “behavioural bias” – limited annuity purchases are plausible due to psychological or behavioural bias”. I’m not quite sure what this means but I’m totally sure that the following statement is incomprehensible to all but the most ardent behavioural scientist.
Hyperbolic discounting. “When people assign values to future pay-outs, the discount rate used to evaluate intertemporal choice is not fixed but varies in line with the length of the delay period, size and signs of the benefits. This effect is called hyperbolic discounting and is interpreted as ‘temporal myopia’.
I think it’s simpler than that, I think people can see a bad deal a mile off. Investing their life savings into gilts with negative real returns is not a good way of providing a wage for life.
The report falls short in convincing us that people should be buying annuities. Given the choice of not buying an annuity, most people take that choice – whether in the UK, the US or America. Only in Switzerland are annuities popular, but that’s because they offer artificially inflated rates by a Government determined to get people to insure against old age.
“The retirement income riddle” is still a good work
Despite some very obscure passages and a pretty dreadful introduction, the second half of the report is very good indeed. This is because it focusses not on academic research (see above) but on conversations with ordinary pensioners, some of whom are relying on an annuity and some on income drawdown,
If their research is correct, low earners do not feel as happy when they drawdown as they do when they have a secure income. The Demos people’s findings are interesting, if a little worrying.
People on drawdown find it harder to take financial decisions
and people in drawdown don’t feel in control
This is worrying because of the £36.8bn which came out of DB last year – most is in drawdown.
This is worrying because 500,000 people a year are exercising their pension freedoms and very few are buying annuities (for good reason)
This is worrying because – as the report says about 20 times in its final section, there is precious little support available to people – and when it is available – it is not exactly going down a storm (only 10% of those eligible have been for their Pension Wise interview).
The report concludes on a sobering note.
As an industry we have a duty of care to support people in their decisions, to ensure they get the retirement they want, need and deserve. Providers, like ourselves, need to do more to help engage consumers and guide them to making better decisions. We hope this report, and our supporting activity with colleagues in the industry, enables this.
There is a more fundamental problem. People do not trust their provider to give them independent advice any more than they trust their annuity products.