Can someone please point out the obvious to me?
You purchase an annual subscription. When you use the same credentials as your monthly subscription, Microsoft add the annual subscription to start after your monthly subscription finishes. In other words, you don't convert the existing monthly subscription, you start a new annual subscription from the end of the latest month subscription.
It's in the FAQs when you go to the renewal in the store:
Q: Will I lose any time if I renew early?
A: No. When you renew early to the same Office 365 subscription that you already have, the additional time is added to your existing subscription. For example, if you have two months left on your current subscription to Office 365 Home and you buy a 1 year renewal, 12 months will be added and your subscription will be good for 14 months.
Important note: Make sure that you use the same Microsoft account that you used when setting up your original subscription. Any time you have remaining will be automatically added to your existing subscription. If you use a different Microsoft account, you will be creating a new subscription.