Taking control of retirement income

The variable annuity market is going through tumultuous times at the moment.

Helen Morrissey talks to Lincoln Financial's Simon O'Connor about how he sees the market developing from here.

Have you seen any evidence that people are looking to amend their retirement plans as a result of the current financial crisis? For instance have you seen people having to delay their retirement as a result of a drop in their pension fund value?

I think we are seeing this. People are now reaching their normal retirement date and get a shock when they receive information from their pension provider that shows their pension fund has dipped dramatically over the past twelve months. For some people, receiving this news has effectively scuppered the plans they have made for retirement so far.

Now, they have to ask themselves a lot of questions about whether they should continue working and if so on what terms? Will they choose part time or will they continue to work on a full time basis for a while longer? Also, will their employer still be prepared to keep them on? This kind of situation forces people to take a closer look at the options available to them.

In the past, many retirees have tended to just take the first option offered to them - usually an annuity offered to them by their pension provider.

However, we are seeing increasing numbers of people going on the internet to research their options and find out how they can take a more flexible approach to their retirement years.

Do you think in a way this financial crisis could be something of a blessing in disguise as it forces people to engage with their retirement planning more?

There is certainly a growing awareness of increasing longevity and retirement options now. We have had variable stock market performance over the past few years and people are now realising that they have to plan rather than fall into retirement. We also have to look at how people view their retirement. People don't feel old at 65 any more. They are often still very active and have plans for their retirement. They are realising that they have many years ahead of them and they need to have enough income to see them through - the movements in the stock market over the past year have taught them that they need to take a more flexible and informed approach. The days of people taking the first retirement product they are offered and thinking "that will do" are over as people are becoming more inclined to search for the best option for them.

What impact do you think The Hartford's recent departure from the variable annuity market will have on the market?

I actually think the market will continue to grow despite this. The reasons for The Hartford's departure are a reflection of the financial troubles it is facing in the US, not the UK.

However, The Hartford has done a lot to further the cause of variable annuities in the UK and from that point of view their departure has been a real blow. Having competition keeps the market alive and vital and so we are sorry to see some of that competition leaving.

Therefore, I would reiterate that the UK remains a robust market for variable annuities going forward. What we have to realise is that financial conditions change and the prices of products will change to reflect this. We will also see products being replaced from time to time as the market evolves.

Nevertheless, the essence of a variable annuity is that you do have options, and you do have flexibility, and both of these things tie into current customer needs. People have saved into their pensions for years and in many cases are able to save a lot of money - it's simply not right that they should sign up for a conventional annuity and lose all control over it. Many retirees want a product that allows them to continue to control their investments and vary the income they take according to their needs. Variable annuities allow you to do this while also benefiting from having a guarantee in place. People want this kind of flexibility and so I don't think the UK variable annuity market will suffer as it continues to serve customers' needs. From our perspective we have continued to see our business grow and I think we will see further providers enter the market in time.

It's no secret that many of the big UK providers are watching the market closely and many have invested time and money in product development. I think when the time is right we will see new products come into the market and competition will increase.

Lincoln has recently been bought by Sun Life Financial - what impact will this have on the market and indeed Lincoln's position in it?

I think this acquisition really demonstrates how far the variable annuity market has come. Sun Life has entered the UK variable annuity market as they believe it is a good place to invest and they have chosen Lincoln because they believe it is a good company to invest in, even during these tough market conditions.

When variable annuities were first launched many advisers criticised them for their complexity and said they were difficult to understand. Are we seeing levels of understanding grow?

We have seen a huge increase in the level of adviser understanding of these products. Many big IFA firms now have panel and approval processes for variable annuities and are looking at them closely. I think this demonstrates that the time variable annuity providers such as ourselves have put into educating advisers is really starting to pay off. Also, if you go back 10 years, many people were saying that they found income drawdown complicated whereas now it is well used. Advisers are really doing their research to get the best deal for their clients and so their understanding of the options available is really growing.

How can we see variable annuities continuing to evolve going forward?

The idea of an investment with an underlying guarantee is compelling and I think there are a number of different ways these products can evolve.

However, I think the single biggest barrier to innovation is legislation particularly surrounding 'age 75'. It is a very arbitrary date and something needs to change. If a client has been in income drawdown up until their 75th birthday they are unlikely to be happy having that control taken away from them when they are placed in an annuity.

While our product does work post age 75 other variable annuities don't, and so other retirees could also find themselves going into alternatively secured pension (ASP) as an alternative to annuitisation. In my opinion there are many areas where ASP doesn't work as the income taken is constrained by GAD limits and you also have the huge tax charges that occur on death. Going forward, we need broader income limits that are based on the retirees' actual age as well as improved death benefits. The way I see it is that you either have to change the 'age 75' legislation significantly to bring in more flexibility or else you have to remove it full stop.

How do you think the at-retirement market needs to evolve? At a recent Retirement Planner roundtable (June 09), one participant said this market sector is tired and needs to be refreshed, would you agree?

I think this sector does need to be refreshed. If you think about it, income drawdown has been around for about 14 years now and annuities have been around since the 1940s. The world we live in is a very different place to what it was even 15 years ago and products need to reflect that. I think variable annuities help in that they enable people to get the best of both worlds as they remain in control of their investments while having the security of a guarantee.

Are you seeing any developments in how advisers are approaching their clients' retirement planning? Are you seeing advisers looking to take a more holistic view?

We are seeing advisers looking to use several products to meet client needs and I think that is going to continue going forward.

People don't want to put their eggs in one basket as they want to look at several options. I think it is an expansion of clients' increasing requirement to control their investments more closely. I think this process will be helped greatly if we can do more to highlight the open market option (OMO) for instance and of course any movement around the 'age 75' rule would be great.

I think the days when clients are apathetic about their retirement choices are coming to an end. There is a demand for greater innovation and choice to meet people's needs and this will be good news for both variable annuities and the at-retirement market as a whole.