The rise of the annuity

Aston Goodey discusses the different annuity products available on the market

Thank heavens for that.

At last as an industry we’re not just talking about the fact that people approaching retirement, or those who have recently retired, are facing years of financial hardship as a result of stock market volatility, increased longevity, and the risk of inflation. We’re actually doing something about it.

There is no doubt that our retiring population is facing a financial conundrum – one that the industry has been at pains to solve for them. Not any more. The industry is innovating, and it looks likely that the world of annuities is set to come into the 21st century.

While the tried and tested solutions of income drawdown and the conventional annuity still have a place in the retirement plans of many customers, equally they are not always the answer and can, in the longer term, create their own problems.

People on the cusp of retirement who want to try and achieve investment growth (mainly because they must recover their losses), are finding that income drawdown is one of very few viable options open to them, particularly if they were wanting to enjoy their tax free lump sum but don’t need to take full income. For those who had already opted for drawdown, the recent stock market losses have meant that they face significant reductions in the size of their pension fund – which of course translates into a lower annuity when converting their pension into an income.

So what can they do? Annuitise now to avoid further losses, but effectively crystallise the loss they have suffered?  Or remain invested in drawdown and hope for a recovery (assuming they are not nearing 75 at which point, many will be compelled to annuitise)? One thing is for sure, locking into a conventional annuity now and giving yourself no chance of increasing your income over time feels like the very worst solution.

Other options

We have seen the rise of the variable annuity, and more recently new arrivals in the fixed-term annuity market. While there is absolutely a place for these products, the drawback for many clients is that they are not written under lifetime annuity rules and therefore come with no lifetime guarantees. So there is no way of knowing the annuity rate your client will receive at the end of the fixed term, which is a risk given the downward trend in conventional annuity rates and Solvency II on the horizon.

That said, you cannot argue that further choice and competition in this market has got to be good. Never before has innovation in financial products been as overdue as within the retirement income market. Our retiring population are hungry for good value, simple products that meet their changing needs in retirement while still giving them a sense of security.

Asset-backed annuities can give clients the best of both worlds. Customers can select and change their income levels to suit their lifestyle needs while also giving them the potential to grow their retirement income and combat the effects of inflation. Crucially, they remain protected by a minimum income guarantee. Like drawdown they have the advantage of income flexibility and death benefits, but they tend to have a less expensive charging structure and have the advantage of mortality gain in the annuity pool.

Below is an example of how an asset backed annuity could work for your client in the longer term.

Asset backed annuities give you the opportunity to advise your client throughout their retirement, offering you trail commission as a result.

We all know that lifestyles and financial situations can change at any time, so these products mean that you don’t have to feel you are backing your client into a corner. The best of the asset backed annuities allow your client to move to a fixed income at any time if they feel it is right for them, some even allow transfer to another annuity provider. Real flexibility: real advantage.

Aston Goodey is sales and marketing director at MGM Advantage