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How to benefit most from annuities

How to benefit most from annuities
Cameron Micallef
29 April 2020 — 1 minute read

Retirees would benefit greatly from an annuity, but it is presented in a difficult way, stopping them from entering into the agreement, new research from Melbourne Business School has found.

Annuities are a type of retirement product that provides fixed guaranteed payments over time, unlike account-based pensions or personal investments which rise or fall with the sharemarket and leave consumers at risk of running out of money in retirement. Annuities provide more financial stability, but require a greater investment up front.

Previous studies have revealed that industry and government professionals have a negative view of such products, but new research argues against this finding.

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“There’s a belief out there that Australians ‘hate annuities, which is a strong word, but its the one that gets used,” said senior research fellow Teagan Altschwager.

“When we talked to financial advisers and people from super funds and government about annuities, most of them said they thought customers don’t like them or understand them, leading them to not purchase.

“Our research shows that is only partially true, in that customers do struggle to understand annuities, but there would likely be much greater demand if the options were presented in a simpler way.”

One of the key findings was that about as many people were primarily interested in annuities as they were in traditional “drawdown” options, such as account-based pensions.

“What I found most surprising was the relative size of the annuity group to the drawdown group. Based on industry attitudes, you might expect the annuity group to be much smaller, but in our data, it was essentially the same size,” Dr Altschwager said.

“To me, this suggests there is far greater appetite for annuities than people think and that account-based pensions may be the main product in the market simply by default or out of ignorance, rather than actual preference.”

However, when it came to comparing various annuity options, study participants appeared to be overwhelmed by the choice.

Dr Altschwager said the research had major implications for policymakers, financial planners, fund managers and others working in the financial or retirement sectors.

“Industry and government both seem committed to shifting peoples mindset from focusing on accumulating as much money as possible for later life, and instead getting them to think about how to use that money and make it last for retirement,” he said.

“Annuities are one viable option for achieving this, despite the prevailing attitude. At the very least, people should question where that attitude has come from and not take it as gospel.”

How to benefit most from annuities
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