Loss aversion
’A loss is more painful to people than an equivalent gain is rewarding’
Prospect theory tells us that most people wouldn’t take a bet to win £1 if they could also lose £1. Generally, the upside needs to be around twice the downside to attract people. This asymmetric view of risk is even more pronounced in retirement. A US study found that the very act of retiring makes people more risk averse. Loss of salary and the uncertainty of knowing how long money needs to last can be unsettling.
action
Annuities have been tainted by a hostile press in recent years, but they still provide valuable peace of mind:
- Present annuities objectively and avoid bias. The FCA has taken an interest in how annuities are presented to clients (see ‘Framing’).
- Remember death benefits, often one of the objections people have about annuities, are now more flexible than ever before.
- Income is usually higher than the recommended safe withdrawal rate of income under drawdown (though drawdown holds out the prospect of income growth).
- What price peace of mind? Ask clients if they’d prefer to focus on enjoying retirement, rather than worry about managing their money?