It is difficult, if not impossible, to obtain reliable information regarding how many deferred annuity owners take their contracts to annuitization, but the general impression throughout the industry is that it is only a small percentage who actually do annuitize.
Likewise, only a few people who retire actually purchase an immediate annuity with their retirement funds–either rollovers from qualified retirement plans or other savings sources. Indeed, the bulk of rollovers from qualified retirement plans seem to go into custodial accounts with banks and mutual funds that can offer income only for life expectancy, not for actual life.
The variable annuity industry has recently offered guaranteed minimum withdrawal benefits to VA owners. This feature seems to be garnering wide acceptance, so much so that it is generally considered to be a serious competitive disadvantage not to offer GMWBs. But, if GMWBs are so popular, why are annuitizations not equally popular?
Producers contacted about this almost always answer that annuity owners do not like to lose control over their retirement funds by "tying them up" in annuitization. Owners seem to worry that the lack of liquidity inherent in annuitized contracts does not provide enough flexibility to cover unforeseen emergencies or other contingencies that may occur in the future.
We are sympathetic with this concern. Today the U.S. has the first generation with the potential need to support self, children, grandchildren and parents (and, with increased longevity, maybe even grandparents)–perhaps simultaneously.
Indeed, stories about retirees having grandchildren dropped off by children who cannot cope with the financial and emotional challenges of parenthood are amazingly familiar. Inheriting a grandchild can have a disastrous impact on retirees who have carefully planned their finances but have not factored such unforeseen developments.
Probing a little deeper, it also becomes apparent that many annuity producers dislike the prospect of losing the ability to assist customers with future new products, if all the customers' retirement funds are tied up by annuitization. Thus, lack of liquidity is a disincentive not only for the customer but also for producers who might like to be able to sell the customer something new in the future.
Some insurers have begun addressing this liquidity problem with annuity features that provide a measure of liquidity. These features range from permitting commutation of any term certain elements in an annuitized contract to providing a retrospective look at the life contingency elements and thereby allowing an element of liquidity.
Such liquidity features can provide a one-time boost, but this is hardly enough to meet prolonged financial needs that were not anticipated.
