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The Actuary The magazine of the Institute & Faculty of Actuaries

Who would buy an annuity?

If it were not compulsory to do so, nearly 60% of people in the UK would not convert their pension savings into an annuity, according to research by Jonathan Gardner and Mike Wadsworth of consultants Watson Wyatt.

Based on a sample of over 3,500 individuals aged between 50 and 64 years of age, Watson Wyatt found the dominant reason for preferring not to annuitise is a preference for flexibility (cited by 74% of those unwilling to annuitise). Some respondents also indicated a lack of trust in the insurance companies providing annuities. Among those who would choose to annuitise there is, on balance, a preference for annuitising earlier rather than later, the ratio being approximately 3:2 in favour of annuitising earlier.

‘We had expected that the improved rates of conversion of funds into income at later ages would have persuaded consumers to defer annuity purchase’, said Mike Wadsworth. ‘But these responses may indicate a concern over loss of value on premature death.’

The Watson Wyatt research, which was carried out by the YouGov polling agency in late 2003, suggests that the dislike of annuities reflects a low regard for the positive features of annuities – such as security and sustainability of income – alongside concerns about possible weaknesses – loss of flexibility and exposure to loss of value on early death.

Factors showing a significant relationship with willingness to annuitise included:

  • health (those in good health are more likely to annuitise);
  • education (more likely to annuitise with higher attainment);
  • household size (less likely to annuitise as household size increases);
  • income (higher earners are more likely to annuitise);
  • major pension provision is defined contribution or personal pension (more likely to annuitise).

Reasons given by respondents as to why they would prefer not to annuitise include:

  • Would like flexibility – 74%
  • Believe they could do better themselves – 46%
  • Income too low – 45%
  • Wish to pass on assets – 38%
  • Not live long enough – 37%

The Watson Wyatt research report ‘Who would buy an annuity?’ can be found at www.watsonwyatt.com/annuities or requested from sue.morgan@eu.watsonwyatt.com.