Retirement decisions are among the most consequential financial choices clients will ever make. Yet, these decisions are rarely just about numbers. They are shaped by behavioural biases, tax implications, and longevity risks that most retirees cannot navigate alone. This is where financial advisers become indispensable, not only as technical experts but as behavioural coaches and strategic planners.
The choice of the type of annuity to provide a retiree with an income during retirement is often treated as a product exercise, but it’s deeply emotional. Fear of losing control, anxiety about dying too soon, and panic during market volatility can lead to poor decisions. Momentum Wealth’s data shows how these fears manifest: during periods of market stress, emotionally driven switches more than doubled, with a ‘behaviour tax’ of up to 8% yearly for anxious investors.
Advisers can counter these biases by reframing choices and using tools that make trade-offs visible.
For example, to address the perceived loss of control, hybrid solutions can help clients by allocating a portion of their capital to a guaranteed life annuity for a baseline income, while retaining the flexibility of a living annuity.
Adding a guarantee term and examining payback period illustrations when a client considers a guaranteed annuity can help them understand when their income would equal or exceed the original purchase amount, thereby alleviating concerns about the insurer retaining their money upon death. To address inflation risk, advisers should highlight how a level income erodes purchasing power by 60% over 20 years at a 5% inflation rate, and guide clients toward inflation-linked options.
The drawdown dilemma
ASISA’s latest data shows average drawdown rates in living annuities have dropped below 6% for the first time since 2011, which could be seen as a positive trend. Yet, more than 40% of clients still draw above 7.5%, putting them at risk of running out of money.
Advisers need to emphasise the importance of sustainable drawdowns and demonstrate the impact of choices through modelling. Momentum Wealth’s Income Illustrator, for example, shows how a 7.2% drawdown can deplete income within 10 years, while blending in a guaranteed annuity portion can extend sustainability well beyond age 90. These scenarios make the consequences tangible, helping clients make informed choices.
Retirement planning isn’t only about income longevity; it’s also about tax efficiency. The difference between annuities purchased with retirement fund money (compulsory) and those purchased with discretionary money (voluntary) is significant.
The income from a compulsory purchased annuity is fully taxed at the marginal rate, whereas the income from a voluntary purchased annuity may qualify under Section 10A, where only the interest portion could be taxed.
Retirement is not static. Health, family needs, and priorities evolve. A client’s context at age 60 may be different from their context at age 70, for example. Advisers who engage early, revisit plans regularly, and leverage behavioural insights and tax strategies will deliver outcomes that go beyond financial security. They deliver peace of mind.
