Annuities: choose wisely

Financial advisors have the critical challenge of helping their clients convert retirement capital into an income stream to see them through their retirement years.

Happy retirement

There are two main annuity income products (AIPs) that financial advisors assist their clients to choose from, namely: a guaranteed/life annuity (or annuitisation); and a living annuity (or self-annuitisation). The former guarantees an annuity income for life, whereas the latter exposes capital to volatile investment returns, with the possible danger of depletion before death, especially in the wake of excessive withdrawals.

Contrary to the recommendation based on economic theory, very few people avail themselves of the benefits that a guaranteed annuity provides – instead most retirees prefer a living annuity, an investment portfolio from which the annuitant withdraws income, with the possibility of leaving heirs a bequest of the remaining retirement capital at death.

The worldwide phenomenon of reticence among retirees to protect themselves against longevity and investment risk is an annuity puzzle that has been the subject of vigorous academic debate and applies especially in the South African context.

A better understanding of the annuity puzzle is essential, especially in the wake of longer life expectancies of retirees due to medical innovation, unsustainable living annuity withdrawal rates and poor investment performance delivered by the JSE All Share Index (ALSI) from time to time.

Very few people avail themselves of the benefits that a guaranteed annuity provides – instead most retirees prefer a living annuity.

Annuity decision-making factors

In my PhD research, I looked at the factors associated with annuity decision-making. Specifically, the factors (grounded in annuity puzzle literature) that relate to i) individuals’ annuity perceptions and intention pre-retirement and ii) annuitant satisfaction levels post-retirement, were investigated. The two parts of the study ran concurrently with distinctive samples. I performed a quantitative analysis on cross-sectional primary data collected by conducting survey research using online questionnaires.

The sample for the first part of the study consisted of employees of Stellenbosch University (SU) who are members of the University of Stellenbosch Retirement Fund (USRF), and employees of Exxaro who are members of the Exxaro Retirement Fund.

In part one of the study, 63% of the total sample (311 respondents) had chosen a living annuity and 37% had chosen a guaranteed annuity. The ratio of respondents choosing a living annuity over a guaranteed annuity of ≈1.73:1 is expected, as most South Africans favour the living annuity option. The sample in part two of the study consisted of former employees of SU, who are fully retired from the USRF, and Glacier annuity clients. In part two, 76% (229 respondents) out of the total sample of 303 respondents had chosen a living annuity, exactly as the annuity puzzle predicts. The data from both samples was collected in June 2020.

A discussion of how some of the annuity decision-making factors interrelate brings us to the main conclusions of the study.

1. Managing retirement capital – burden rather than blessing

The most unexpected finding from the research was that the desirability for flexibility and control over retirement capital to pursue capital growth significantly contributed to discontent. Paradoxically, the attributes that initially positively related to the favourability of a living annuity can often be associated with dissatisfaction in retirement. In other words, respondents (pre-retirement) with investor confidence and a desire for flexibility/control and accessibility find self-annuitisation beneficial.

However, when another group of respondents were asked about the responsibilities that come with self-annuitisation in their retirement, these factors that were desirable before retirement, became a burden. Deductively, this finding challenges the accepted belief in Western culture that more control, choices, flexibility and autonomy lead to a better outcome or an improvement in well-being.

The flexibility and control of managing a living annuity and earning an above-average return shift the responsibility and burden of not making suboptimal decisions to the annuitant, whereas a guaranteed annuity runs automatically and requires no further decision-making, once the initial irreversible decision of exchanging a capital lump sum for a consistent income stream of payments has been made.

The belief of “doing better” with a living annuity (as opposed to a guaranteed annuity) could be attributed to investors looking at the annuity choice through the investment lens/frame, by focusing on the return and risk features of an AIP, without considering the consequences for consumption.

The attractive feature of self-annuitising under the investment lens/frame is the possibility of generating superior investment returns, whereas the unattractive feature of annuitisation through the investment lens/frame is the potential to lose money in the event of premature death. The unattractive feature of a living annuity under the consumption frame is the possibility of outliving retirement capital. However, under the consumption frame, a guaranteed annuity is attractive, as it serves as a form of insurance for consumption throughout retirement.

Dr Jeannie de Villiers-Strijdom, CFP®, Senior Lecturer and Postdoctoral Fellow, Department of Business Management, Faculty Economic and Management Sciences, Stellenbosch University

Annuity characteristics should be viewed through both lenses/frames to enable retirees to have a more balanced outlook on annuity decision-making. Retirees should be made aware that the extent of the responsibility/load in managing living annuity capital, especially in old age, or when the spouse who handled the finances dies first, can become unbearable.

2. The fear of outliving retirement capital

The fear of outliving retirement capital contributed to living annuitants’ dissatisfaction with retirement. Having the option to access retirement capital and withdraw large capital lump sums may tempt retirees to use such capital unwisely. A strong sense of discipline is required to honour the ultimate goal of retirement funds, ie providing the annuitant with an annuity income stream for life. The freedom of selecting investments and deciding on withdrawal rates therefore comes with much responsibility.

In behavioural finance, the theory of risk-order bias supports the notion that individuals underrate the probability of far-off periods, in contrast to near periods. As a result, the probability of poverty in old age is gravely underestimated.

Understanding the tried-and-tested mechanisms underlying a formal guaranteed annuity market could offer retirees a lifestyle unencumbered by the fear of outliving retirement capital. Especially recently, given South Africa’s favourable yield curve/long rates.

Annuity decision-making tool

For an annuity decision-making tool, consisting of two questionnaires and user’s manuals, to be used by financial advisors/benefit counsellors, in educating and guiding their clients (pre and post-retirement) with respect to their choice of an optimal AIP, the researcher can be contacted at

3. The bequest motive

The bequest motive, which refers to the annuitant’s desire to leave the remaining retirement capital to heirs at death, is significantly related to individuals’ positive attitude towards a living annuity.

The bequest motive is mostly driven by an altruistic desire to leave something of value behind to surviving family members at death.

The uncertain nature of this potential bequest should be given due consideration, as no-one knows for sure what the amount of the bequest will be or when it will occur. The eventual size of the bequest could also potentially have a negative value, in the event of capital depletion before death, in which case family members may instead “inherit” the financial obligation to provide for the retiree. It could also be argued that relieving one’s family of the financial burden of support is an altruistic gesture in and of itself. A guaranteed annuity exempts the retiree’s family members from the financial risk and subsequent burden of providing for the retiree at some future date.

4. Role of the financial or benefit counsellor

Having trust in the integrity of financial advisors is significantly related to individuals’ annuity perceptions and intentions. AIP awareness and financial literacy are not only related to individuals’ outlook on annuities but also their eventual satisfaction in retirement.

Therefore, financial advisors and benefit counsellors have a duty of care to assist their clients in extensively examining the validity and legitimacy of the underlying motives and reasons for favouring any AIP, otherwise, it may direct their choice unjustly. In addition, creating awareness of various cognitive biases present in annuity decision-making could facilitate rational and deliberate AIP choices.

Closing remarks

The freedom obtained by choosing the self-annuitising route carries a great responsibility and the burden of living with the potentially irremediable consequences of your choice. Alternatively, receiving a guaranteed income stream (either partly or in full) affords the freedom to live unbound without any further difficult investment decisions or the possible detrimental consequences of outliving retirement capital.


1) De Villiers-Strijdom, J., 2021, “Annuity decision-making”, Doctoral thesis, Stellenbosch University. https://scholar.sun.

2) De Villiers-Strijdom, J. & Krige, N., 2023, “Living annuity satisfaction”, Journal of Economic and Financial Sciences 16(1), a841. v16i1.841.