Australians turned off annuities … but the Swiss love them

Just 4 per cent of retirees in Australia used their pension pot to pay for an immediate lifetime annuity in 2012, while the figure was as low as 0.2 per cent in 2006/7, according to a review of research in the country by Capita Employee Benefits.

Capita says the Australian research paints a difficult future for annuity providers unless they adapt their propositions significantly.

It points to 2012 research from Challenger, the largest annuity provider in Australia that found that only 4 per cent of retirees purchased an immediate lifetime annuity.

Research from the University of New South Wales found that 45 per cent of superannuation assets were taken as an income stream in 2006/7, of which less than 0.2 per cent was taken as a lifetime annuity. Capita says uptake at that time may have been so low because of the strong performance of the stock market.

But research by Towers Watson published in 2013 found 80 per cent of retirees took an annuity, highlighting the way traditional practises and different national cultural characteristics impact the likelihood of individuals taking an annuity.

The 2012 Challenger research found 32 per cent used their pension pot to pay off their mortgage, pay for home improvements or buy a new home, 27 per cent invested the money elsewhere and 21 per cent rolled it over or invested it in an approved deposit fund, deferred annuity or other super scheme. The research found 19 per cent bought a new car, 14 per cent paid for a holiday and 12 per cent cleared other debts.

In Australia the most popular form of retirement income are phased withdrawal products, which work in a similar way to drawdown in the UK. Other options include fixed term annuities, paid for 30 years or some other fixed term, or products that pay back a percentage of capital at the end of the term.

Capita Employee Benefits head of marketing Robin Hames says: “The University of New South Wales produced further research, comparing Australia with Switzerland, describing the two countries as pioneers of mandatory private saving.

“In both countries, people pay contributions that are invested into a pension fund. But at retirement, Swiss retirees favour life annuities, whereas Australians prefer non-annuitised products – originally lump sums but increasingly drawdown-style products. In Switzerland, life annuities and lump sums are available – but not phased retirement products.

“The University does attribute these preferences to traditional reasons. It comments that the low demand for annuities in Australia has puzzled economists, but suggests that the high price of annuities could be one reason.

“Australia has similarities with the UK, although we are coming from a different position. But these figures suggest annuity providers are going to have to be innovative and inventive if they are to make inroads into the new at-retirement market.”

A 2013 Towers Watson report said: “Switzerland’s rate of annuitisation is quite high — about 80 per cent — despite the lack of any mandate and encouragement from some employers for retirees to take lump sums. This enthusiasm for annuities has been ascribed to the cultural attitudes of Swiss workers, who are financially conservative and prefer guaranteed incomes for life.”