Despite their usefulness, annuities are a minority choice for retirees with defined contribution (DC) plans. RGA’s research found that behavioral science-informed changes to how annuity products are positioned can improve comprehension, mitigate biases, and increase willingness to consider the lifetime income protection annuities provide.
Imagine being asked to pilot an airplane with no formal training. You would have to determine how much fuel is required, navigate changing weather conditions, and make a series of difficult decisions along the way – all without any seat time in the cockpit.
For many retirees, managing retirement savings can feel similarly befuddling.
In the past, traditional defined benefit (DB) pension systems left most responsibilities to be handled by employers and pension providers. Today, the dwindling of DB plans and rise of defined contribution (DC) systems increasingly places those responsibilities on individuals. Retirees must navigate longevity risk, market volatility, inflation, and a retirement that may last decades.
Annuities can help address some of those challenges by converting accumulated savings into a dependable income stream and helping manage longevity risk. Yet they remain a minority choice for many retirees and near-retirees. Economists have long referred to this disconnect as the “annuity puzzle.”
Product features, pricing, and market conditions all matter, but retirement-income decisions are also influenced by psychological and behavioral factors. RGA’s recent research explored how those factors affect annuity decisions and what approaches may help consumers make better-informed choices.
The findings point to three interconnected challenges: low understanding, competing preferences, and predictable behavioral biases. They also suggest that behavior-aware design can help consumers make better retirement-income decisions.
The research further suggests that these approaches are complementary. Consumers should be supported in making informed choices, while retirement systems should also be designed to produce better outcomes when engagement falls short.
The research began with a basic question: Do consumers understand annuities well enough to evaluate them confidently?
Previous research in both the UK and the United States has consistently found that consumer understanding of annuities is limited. The RGA study involved 1,200 UK retirees and near-retirees. Participants reviewed information about a realistic but fictional annuity product and then answered questions designed to measure comprehension.
On average, they answered only about half of those questions correctly.
One of the most striking findings involved underwriting. Many participants believed excellent health would result in the highest annuity payout. In reality, individuals with qualifying health conditions may sometimes receive enhanced rates because of their shorter expected lifespan. These types of underwritten annuities are available in the UK market and have been discussed as a potential opportunity in other markets as well.
This misunderstanding is not of a minor detail. It was a misunderstanding of a core product feature.
The findings suggest that consumer understanding remains limited and that improving comprehension is an important part of helping retirees engage with retirement-income decisions and make informed choices.
Understanding, however, is only part of the story.
The research also found that many consumers value benefits that can be difficult to reconcile within a single solution.
When participants were asked what they liked about annuities, they prioritized certainty, guaranteed income, and financial security. Yet many also expressed concerns about reduced flexibility and the perceived permanence of the decision.
In other words, consumers often want protection from future uncertainty while preserving freedom of action. Behavioral science helps explain why that tension can be difficult to resolve.
Retirement-income decisions are further complicated by a set of well-documented behavioral biases.
Present bias encourages people to place greater weight on immediate gains and losses than on outcomes that may occur many years in the future. Retirement planning, by definition, requires individuals to make decisions on behalf of their future selves, making this bias especially relevant. It also helps explain why some consumers are reluctant to give up access to capital today in exchange for a benefit that may be realized many years in the future.
People also tend to value keeping options open, even when those options may never be used. Loss aversion can magnify concerns about product trade-offs, making the prospect of giving up access to capital feel more important than the benefits of guaranteed income.
In the case of annuities, consumers may focus on the possibility of dying early and losing money or access to their capital, rather than on the risk of living much longer than expected and needing income to support that longevity.
Autonomy bias can increase resistance to solutions that are made on a retiree’s behalf, even when those solutions may be beneficial. Inertia can cause consumers to postpone action altogether when choices are unfamiliar or difficult to evaluate.
These biases are not anomalies. They are predictable patterns in human decision-making, which means they can be addressed through communication, product design, and broader decision design.
One of the study’s most important findings was the impact of behavioral science-informed communication changes.
Researchers tested several versions of information describing the same hypothetical annuity product. One reflected a more traditional presentation. Other versions incorporated behavioral science principles, including simplified language, familiar examples, clearer information hierarchy, stronger visual cues, and framing that made longevity risk more salient and emphasized protection against it.
The product itself did not change. The presentation did.
Perhaps the most important finding of the research is this: When information was simplified and positioned around protection, comprehension increased by 12%. Participants also reported greater confidence, a stronger sense of control, and a more positive perception of the product. Willingness to annuitize increased as well.
For insurers, that finding is significant. Previous behavioral science research has found that improvements in consumer comprehension can positively influence customer outcomes and engagement. The findings suggest that communication and presentation can meaningfully shape how retirement-income solutions are understood and evaluated.
The communication findings were encouraging, but they do not tell the entire story.
One of the best-known examples in behavioral science comes from retirement savings itself. Research has consistently shown that participation rates increase when enrollment becomes the default option, rather than requiring individuals to take action themselves. The economics remain largely the same, and the freedom of choice is preserved, but the decision environment changes.
The same principle may apply to retirement income.
When preferences are unclear and choices feel difficult, people frequently postpone decisions or avoid making them altogether, following the path of least resistance, regardless of whether it’s the best outcome. In those situations, system design can be as important as product design.
Clearer communication can improve understanding and reduce some behavioral barriers. However, another school of thought recognizes that active choices are not always made and focuses on creating structures that ensure good outcomes are presented as the path of least resistance.
Behavioral science suggests there may be opportunities to improve outcomes through thoughtfully designed defaults that lead to a higher chance of good outcomes while preserving choice, staged annuitization decisions, timely engagement approaches, and retirement-income solutions that align more naturally with the way consumers make decisions.
Ultimately, consumers should be empowered to make active, informed choices about their finances. At the same time, retirement systems can be designed to support good outcomes when engagement falls short, decisions are too complex, and preferences are weak.
The annuity puzzle has often been framed as a product challenge. RGA’s research suggests it may also be viewed through the lens of decision design.
The findings suggest that low understanding, competing preferences, and predictable behavioral biases can influence retirement-income decisions. They also suggest that thoughtful communication, positioning, and behavior-aware design may help address some of these challenges.
Importantly, the goal is not to persuade consumers that annuities are always the right choice. It is to help them better understand their options, weigh trade-offs, and make decisions that align with their needs and circumstances.
As defined contribution plans place more responsibility on individuals, retirees are increasingly being asked to become pilots of their own financial future. Behavioral science cannot eliminate turbulence, but it can help make the cockpit easier to navigate.
Closing the annuitization gap will require more than communication or choice architecture alone. It will require both – helping consumers make informed decisions while designing systems that recognize the realities of human behavior.
For insurers and retirement providers, that means creating strong products and decision environments that help people make better choices.
Read the full paper for more details and further insights to help your business capitalize on the annuities opportunity.
