Lottery Annuities

I don't know if you've noticed it too, but it seems to me that the majority of American Powerball and Megamillions jackpot winners tend to take the lump sum option rather than the annuity. If this were simply a case of them having all of their cake now instead of having it served one slice at a time, the decision would be understandable. But when you consider that choosing a lump sum means that they get a lot less cake overall, their logic is not so apparent.

The annuity option even doesn't come up in the UK, and nor does that other bug-bear of American players, taxation. In Britain, every penny of any lottery jackpot won is kept by the winner, because (under current legislation at least) all gambling winnings are exempt from tax. In the USA, lottery winnings are subject to taxation just like any other form of income, which makes opting for a smaller lump sum instead of regular annual payments (which cumulatively provide more for the winner) seem strange.

Of course, everything is dependent on the situation of the individual winner. If a jackpot winner gets lucky later in life then it might make sense for them to take a smaller lump sum so that they can enjoy all of it straight away - especially if they suspect they may not still be around in twenty years time. But young players with their whole lives ahead of them also opt for lump sums more often than not, and that just doesn't make sense unless they happen believe the world is going to end.

I think one of the main reasons why so many people take the lump sum is because they have their eyes only on the short term. The society in which we live has encouraged us to spend today and worry about tomorrow when it comes, and winning a lottery jackpot doesn't change necessarily that attitude if it has already been developed.

Whilst an objective person who considers the long term may well decide that the sensible thing is to go for the annuity (even if it means buying a more modest home, car and holiday at the outset) a person focused only on the here and now may see a lump sum as his only option, because they want to experience the much-publicised "millionaire lifestyle" in all of its decadent glory.

And so I find myself reaching an interesting conclusion: those who opt for a lump sum at an early age, and with no other logical reason to do so, aren't really interested in long term wealth. What they want is a lifestyle of the rich and famous, and they want it now. An annuity would usually make them richer in the long term, but it doesn't have quite the same "sexy" appeal that receiving millions at once does.

Of course, it could be argued that the lottery officials know this, and are actually depending on it to save them a shed load of cash... or is that just a tad cynical of me?

Article Last Updated: 24/01/2007 12:54:13

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