Solving the ‘annuity puzzle’ requires a human-centric rethink. 

Despite developing mathematically elegant products with sophisticated risk management and careful pricing, something has been missing from the landscape for retirement longevity solutions: widespread adoption. This disconnect begs a crucial question: Are we actually solving the right problem? 

Consider a typical 65-year-old with $500,000 to invest for retirement. The financial services industry might suggest, “Why not invest in a product guaranteeing income for life? You’ll have confidence to spend, knowing your money will never run out.” 

But that same person might be eyeing an investment property generating $20,000 in annual rental income — a straightforward 4 per cent return they can easily understand and visualise. 

When they compare this to a lifetime annuity paying $35,000 annually, their perspective is revealing. While financial professionals see valuable longevity protection and potential aged pension means test concessions, the average Australian sees something starkly different: “Property gives me 4 per cent, potential capital growth and an asset to leave to my children; annuity gives me 7 per cent, but my capital disappears.” 

The competition isn’t between different retirement products; it’s between sophisticated financial instruments and people’s simple mental models of how money should work. 

The psychology behind the ‘Annuity Puzzle’ 

Behavioural economics offers fascinating insights into what’s happening here. Research consistently shows people avoid annuities even when they would objectively benefit from them – a phenomenon called the “annuity puzzle.” 

Economic theory suggests people should value annuities highly for their guaranteed lifetime income and protection against outliving their savings. Yet very few voluntarily purchase immediate annuities, and many choose lump sums over annuitisation when given the choice. 

Several psychological factors explain this contradiction. People typically view annuities through the lens of potential loss rather than gain. They focus on scenarios where they might die early and “lose” their premium, rather than protection against outliving their savings. 

Retirement income products are often complex and unfamiliar to most Australians, leading to avoidance rather than engagement. This complexity creates a cognitive burden that many simply choose to sidestep. 

Perhaps most telling is research on choice overload. When presented with too many options or too much complexity, people often choose nothing at all. Product features designed to provide flexibility may actually be triggering decision paralysis. 

A path forward

If we want to help more Australians achieve secure retirements, we may need to approach this challenge differently. 

It’s on us to make it easier for Australians to understand retirement solutions, and that can be as simple as the names we give the options. If the term “annuity” feeds perceptions of complexity, then maybe we need to call it what it actually does: a lifetime pension or lifetime income. Some leading super funds are already adopting this shift, making it more meaningful for members and avoiding negative perceptions of the past. 

Research shows that presenting lifetime pensions as “monthly income” rather than emphasising the lump sum cost significantly increases acceptance. More focus on lifetime pensions as lifestyle maintenance tools rather than investment products to show people how they can maintain their desired standard of living throughout retirement will likely assist. 

Leveraging broad data to generate more sophisticated member cohorts may help support strong nudges. “Comprehensive retirement” approaches that present part lump sum, part account-based pension and part lifetime pension as one proposition, reduce psychological resistance while still providing longevity protection. These structural changes can overcome inertia without removing choice. 

We need to help people visualise longevity risk through simple illustrations that show the probability of living to different ages. Communications could focus on core benefits rather than complex features. Explaining the opportunity costs of not protecting against longevity risk may significantly shift preferences. 

We know that recommendations from trusted advisers significantly increase acceptance of retirement income products. Developing accessible guidance tools can give people confidence that they’re making the best choice for themselves without requiring complex financial calculations. 

Starting with human needs

Instead of starting with “How do we build and sell the most technically excellent product?” what if we asked, “What simple problem do real Australians actually recognise they have?” 

The people who need longevity products aren’t financial experts. They’re teachers, tradies and office workers who want assurance they won’t run out of money before they die. What if we built from that simple, human need, rather than from technical perfection? 

This doesn’t mean abandoning rigour — that’s what makes these products work. But we could channel expertise differently, optimising for human understanding rather than financial sophistication? 

Ultimately, we’re all trying to solve the same problem — helping Australians have confident, secure retirements. By focusing on how people actually think about retirement security rather than how we think they should think about it, we can help bridge the gap between effective financial solutions and genuine human needs. 

And that might just be the key to solving the retirement puzzle. 

Jenny Oliver is Chief Executive – Group Life and Retirement for TAL. This is an edited transcript of a speech delivered at the All Actuaries Summit in Sydney in June.