Ask the Experts: fitting unit-linked guarantees in your retirement strategy

Question: Where do unit-linked guarantees fit in as part of a retirement strategy?

Answer - Colin Bell, European variable annuity product director, Aegon

With the long-established trend by employers away from defined benefit pensions, initially for new entrants but more recently also for future accrual, and State-funded pension under pressure, individuals are increasingly being faced with less dependable future income in retirement.

Furthermore, the typical alternative of the defined contribution scheme transfers all the risks associated with eventual retirement income from the employer to the individual. The question is whether individual savers would be comfortable with that position if they really understood the risks they are taking on.

I would argue that individuals need and value a minimum level of dependable future income. Recent falls in global equity markets and the decline in UK long-term interest rates have powerfully illustrated the risks - adversely affecting the latest generation of pensioners retiring with defined contribution pots through lower funds and lower rates for converting these pots into retirement income.

Unit-linked guarantees can play a key role in retirement planning, enabling savers to transfer risks to an insurer in return for minimum underpinning guarantees, growth potential with lock-ins and flexibility. For pension assets, they sit between the security (but inflexibility) of conventional annuities and the risky but flexible pension drawdown plans.

They can offer capital guarantees or future lifetime income guarantees in the pre-retirement consolidation phase with guarantees carrying into the decumulation phase, enabling investors to lock in growth at regular intervals, potentially increasing future guarantees.

Their relevance for any given individual will clearly depend on risk profile, accumulated assets and access to other sources of retirement income. Unit-linked guarantees will not be right for every client, nor for the full retirement fund of any particular client – but they may certainly play a part in overall retirement planning as part of a portfolio approach.

They could be used to secure a minimum level of income, perhaps covering basic living expenses, leaving the adviser and client to pursue more adventurous plans with other assets.

For non-pension assets, or the pension commencement lump sum, they can be used for top-up retirement income via onshore or offshore bond vehicles.    
All in all, unit-linked guarantees offer a valuable benefit which complements other solutions in an overall retirement strategy. I believe that their place in retirement planning will increasingly be recognised in future.