The Big Question

Each month we ask leading industry figures to answer one big question: Recent research by Towers Watson showed a 24% increase in sales of enhanced annuities in 2009. What are the key factors contributing to this rise?

Peter Carter is head of product marketing at MetLife UK

People want to maximise their retirement income, and enhanced annuities do exactly what the name says. Rates on conventional annuities have dropped by around 28% in the past 10 years due to a combination of increasing longevity and falling gilt yields.

Faced with low conventional annuity rates it is not surprising that people are opting for enhanced annuities.

Providers are helping by launching products into the growing market while advisers are doing a good job explaining the retirement income options to their clients. The push by regulators to increase uptake of the Open Market Option (OMO) and the Association of British Insurers’ ORIGO Options pension transfer system is also contributing.

Aston Goodey is director of sales and marketing at MGM Advantage

We are not at all surprised that enhanced annuities now account for almost one in five of annuities sold as they have experienced a strong growth in sales for several years now. This is predominantly due to the fact that the products offer fantastic returns, paying out around 22% more income each year compared to standard products. This means that over the course of an average retirement a man eligible for an enhanced product with a £50,000 pension pot will find themselves over £12,500 better off¹.

A second factor is that awareness of enhanced products is on the up and those approaching retirement increasingly realise that enhanced products are open to people with relatively minor health conditions, such as high blood pressure.

However, more can, and needs to be done around raising awareness of the benefits of enhanced annuities. Too many people still take the first annuity offered to them and are unaware of the OMO. They also fail to investigate whether they might be eligible for an enhanced product in the first place.
¹Based on the MGM Advantage Annuity Index which is an analysis of the whole annuity market. Data is provided by Moneyfacts Life and Pensions.

Peter Gould is annuity development manager at Canada Life

Enhanced annuities can provide significantly higher levels of income for a client, and consequently are a ‘must have’ consideration for advisers in the ‘at retirement’ market. Clients are now better advised of this option via their provider’s improved pre retirement packs, and advisers are increasingly aware that enhanced annuities are not just available to smokers and the chronically ill.

We have seen improvements to the quotation process, and quotations can be requested from the whole of market using a standard ‘quotation request form’ in 1-2 days. This enables all providers to offer their best rates and also makes sure the adviser is getting the best deal for their client.

With continuing process efficiencies and automated systems being developed to access the whole of market, we can expect to see the number of enhanced annuities increase still further.

Peter Gould is annuity development manager at Canada Life

Improved accessibility and awareness among customers and IFAs of the financial benefits of enhanced annuities is improving take up among the target population. I predict the enhanced sector will grow, however, it could explode over the next 5-10 years if IFAs make a change to their advice.

Increasing numbers of healthy 65-year-olds, advised by their IFAs, are choosing to purchase a fixed term annuity rather than a lifetime annuity.  They are doing so because they can receive the same level of guaranteed fixed income for a term, chosen by the customer. However, at the end of the term, the customer can use the guaranteed capital sum to make a different retirement income choice. A choice that is relevant to them at that point, taking into account their income needs, death benefit needs and,  getting to the point of this question, their current health status.

So, given that roughly one in two healthy 65 year olds are no longer healthy by the time they reach 75...then you can see why deferring permanent annuitisation at 65 and purchasing a fixed term annuity can deliver clients not only guaranteed income and more flexibility, but also the potential to increase their retirement income by as much as 75% for those who have unfortunately suffered a serious illness.

Brian Please is business development manager – annuities at Xafinity Paymaster

I could be cynical and say that the scale of increase reflects the increased benefits achievable for the same premiums! I could also suggest it is a drop off in the sale of other annuity products that distorts the success of enhanced annuities. However, let’s be positive, and I think it’s more fundamental than that!

The combination of the push for OMO, the real incentive applicants have to provide comprehensive medical history, the poor price of conventional annuities and advisers wishing to offer best advice are all feeding through to a growth in enhanced annuities.

I have just two fears. Firstly, whether enough insurance companies want to continue to write such business given the impact of Solvency II and longevity and, secondly, you have to start feeling for the truly healthy pensioners where lifetime annuities are poor value compared to temporary, drawdown or variable annuities.

Paul Smith is chartered financial planner at Perspective Financial Management

First of all, this is great news for annuitants. For too long people have simply completed the necessary paperwork to purchase the annuity from the ceding provider without exploring the OMO. This has historically been borne out of not enough information provided by the ceding company, the regulator and the adviser. An increase in the sale of enhanced annuities means that we’re doing the job for our clients and should seek to help more people make the right choices when triggering pension benefits.

Developments such as the Common Quotation Form have helped greatly in assisting advisers find the most competitive annuities for their clients. Efficient medical underwriting and more effective lines of communication between the annuity provider, the client and the adviser have undoubtedly been positive factors.

Last but not least, it’s about the adviser doing the job properly and competently. Effective questioning coupled with up-to-date knowledge of the enhanced annuity market will ensure that sales of these annuities will continue to rise.

Vince Smith-Hughes is head of business development – retirement income at Prudential

The increasing popularity of enhanced annuities is due to a number of factors including widening availability, the increasingly bespoke nature of these annuity arrangements and the improved awareness of advisers and their clients.

Terms available on enhanced annuities vary greatly so it is essential that advisers approach as wide a range of providers as possible for quotations.

They should also consider that enhanced terms are available from some providers on not just conventional annuities but also asset backed annuities. Clearly this is well worth exploring for some clients who are able to gain a benefit from poorer health but equally want to take advantage of the potential gains that investment in a multi-asset fund can bring.

The disadvantage of the increasing popularity of enhanced annuities is that it leads to worse rates for healthy lives. With such pressures, alternative retirement solutions may begin to look more attractive.

Matt Trott is head of annuities at LV=

The growth in enhanced annuity business can largely be attributed to an increase in accessibility.

In recent years, we have seen more providers enter the enhanced annuity market, quotations and underwriting systems streamlined, and more medical conditions covered than ever before.

We have also seen the development of the Common Quote Request Form, and IFAs can now get fully guaranteed quotations from portals such as The Exchange, Assureweb and Web-Line.

These improvements have helped raise the profile of enhanced annuities, and with standard providers now rating by postcode/marital status/occupation, the differences between a standard and enhanced annuity are blurring.

Advisers are becoming comfortable that enhanced annuities deliver significant extra benefits for clients, and the propositions on the market are flexible enough to ensure that they are appropriately remunerated for their extra effort.

Tim Whiting is proposition director at The Annuity Bureau.

It is interesting that this increase directly corresponds with the increase in people using the OMO. It is estimated that a third of those that use this qualify for an enhancement, so in actual fact the 24% of the total annuity market purchasing enhanced annuities should be significantly higher.

As long as the FSA, the press, IFAs and insurance companies continue to promote the OMO we will continue to see a steady rise in those gaining enhanced annuities as people seek advice on how to maximise their retirement income.

Of course the enhanced market continues to get more and more sophisticated and this will have contributed to the rise. The understanding that insurance companies have of the impact of factors such as illness, lifestyle, occupation and even postcodes has continued to help advisers and their clients to make informed choices.

Ian Wilkinson is pensions director at Rutherford Wilkinson

There are several factors which will contribute to this rise. Firstly, the greater awareness among consumers and advisers of the availability of enhanced annuities is the main cause, with more availability from more providers. Another factor is the rise in the number and size of funds which have now been built up in money-purchase arrangements, and are now coming through to maturity.