Research Suggests 2 Keys to Solving the Annuity Puzzle

What You Need to Know

Consumers like the idea of annuities, but adoption of these lifetime income products remains low.
Unless retirees understand how a product works, and how it is likely to benefit them, they aren’t likely to buy it.
Pivoting toward products that are simpler and easier to understand could go a long way to driving uptake, based on some recent Prudential research.

The relatively low allocation to products that provide income for life (aka annuities) among retirees has been well documented and is commonly dubbed the “annuity puzzle.” Decades of research not only documents the effect (i.e., why retirees should be considering annuities more than they do today) but also offers potential explanations for why the puzzle exists.

I recently reviewed the results of a series of qualitative and quantitative interviews conducted by Prudential, as well as other supporting materials, to better understand what some of the key roadblocks around consumer decisions to purchase an annuity are today.

While there are lots of factors to consider, two resounding themes were simplicity and education, suggesting we need solutions that people can understand and information and materials that effectively demonstrate the value in relatively straightforward terms.

People Like Annuities (In Theory)

There is a relatively large body of research suggesting that consumers like the potential benefits of annuities, or products that provide protected lifetime income — at least in theory.

In the latest Protected Retirement Income and Planning (PRIP) study from the Alliance for Lifetime Income, 97% of respondents note having guaranteed lifetime income in addition to Social Security in retirement is valuable, and 93% of consumers who protected their portfolio with an annuity in 2022 are satisfied with their investment choices.

In contrast, only 83% of respondents who made other changes (e.g., shifting the portfolio into more conservative investments) in 2022 were extremely or somewhat satisfied.

People are not necessarily knowledgeable about annuities, though. In a survey conducted in April 2023 among 250 members of Prudential’s branded online custom market research community of target consumers hosted by C Space, 85% said they are not confident about their knowledge of annuities. This uncertainty led to questions about how the product worked, how it benefited them, and what the costs and risks were, which are significant barriers to adoption.

Qualitative in-depth interviews among pre-retirees with savings in retirement plans echo the same desire for clarity while reviewing information on annuities, specifically a single premium immediate annuity (SPIA).