Burrows said annuities are based on the concept of mortality cross subsidy and an annuity ensures that you do not outlive your income.
He explained the benefit from mortality cross subsidy has reduced over time with the increase in enhanced annuities, and said that most people with an annuity today have some type of individual underwriting.
“One of the things that I'm really interested with this annuity/drawdown debate is: how many people in drawdown realise that they are giving up current income in order to leave their funds to their beneficiaries?
“It's quite a logical thing to do but faced with the choice of more income today, more income in retirement or leaving money to the kids. That's quite an interesting one.”
However, he said as people get older, their priorities change from leaving money to their kids to making sure that they have got enough money to enjoy their retirement.
The drawdown debate
When it comes to drawdown, Burrows said there is a lot of “cakeism” involved.
“People do want their cake and eat it,” he said. "People want high income but they also want to leave money to the family but of course, you can't do both.”
He explained that the annuity puzzle refers to the fact that annuities do provide the most efficient way to provide income for life. So why don't more people buy them?
“There's a lot of behavioural obstacles,” he said. “One of my words of wisdom as a financial adviser specialising in this is that nowadays, most people understand the so-called retirement journey.
“Most people understand the difference between annuities and drawdown and the options, but at any point of the retirement journey there are two things happening. There's lots of technical stuff that we all know about annuities, drawdown, investing, critical yields, but there's also a lot of behavioural and emotional stuff going on.
“For clients, it's often the emotional and behavioural side of the decisions that are most important.”
He said the case for drawdown is income flexibility, investment control and lump sum death benefits.
“On investment control, equities should be an effective hedge against inflation over the longer term but the risks of drawdown are underestimated.
“It's the investment risk, but it's also the sequence of returns but at the moment this risk is very real.”
sonia.rach@ft.com
What do you think about the issues raised by this story? Email us on ftadviser.newsdesk@ft.com to let us know
