A fascinating new paper by L&G, entitled Retirement Income Riddle: New perspectives on how we make financial choices and their impact on our wellbeing, looks at the relationship between happiness and the retirement income option people choose.
Conducted by think-tank Demos using the English Longitudinal Study of Ageing database, the research focuses on people on a modest income in retirement – i.e. the bottom half of retirement income distribution.
It found people in drawdown pensions are more likely to show signs of unhappiness and depression. For instance, those with drawdown pensions are more than twice as likely to say they never feel free to plan for the future to those with annuities (12.5 per cent compared to 5 per cent).
These results appear to be consistent across questions about happiness, life enjoyment, depressive symptoms and sadness. Indeed, 20 per cent of people in drawdown versus 8 per cent of people with an annuity said they had not enjoyed their life over the preceding week.
The attempt to link retirement options to happiness should be welcomed. However, I wonder if this is a case of spurious correlation as opposed to causation.
After all, the research also suggests those who choose to purchase a drawdown pension are significantly more likely to rate their health as “very good” or “excellent” than those who buy an annuity. Should we take this to mean annuities make people sick or that sick people buy annuities? You get my point: spurious correlation.
So, is drawdown the root cause of the reported unhappiness for retirees on lower incomes? Or are unhappy, low-income people just more attracted to drawdown?
It is possible that retirees in drawdown worry more about the future than their peers with annuity income. However, isn’t it equally plausible that those who are natural worriers tend to choose drawdown as a way to avoid – or defer – having to make a permanent decision (annuitising) they cannot then reverse?
We are sitting on one of the longest global equity bull markets of the last 100 years. Since September 2008, the UK stockmarket has almost doubled, and the US stockmarket has risen by nearly 180 per cent. I do not really understand why anyone who started income drawdown in the last decade would be unhappy with it unless, of course, they are sitting in cash, withdrawing unsustainable amounts or are invested in the South Asian Forestry fund.
The author noted that “on most measures of wellbeing, social participation and financial security, the crude figures seem to suggest people with drawdown pensions do better, but these associations disappear when we control for health, wealth and education”.
Clearly, there are very good reasons for choosing an annuity, particularly for people on lower incomes. They tend to have low financial capability and are unlikely to have access to an adviser to help manage their drawdown. This research adds to the reasons why annuities might be right for these people.
But there is still a lot we do not know about the link between retirement income options and happiness – particularly for typical adviser clients, who tend to be at the wealthier end of the spectrum.
Abraham Okusanya is director of Finalytiq