Over the recent past, there has been a growing number of new products entering the UK retirement market that guarantee a pension will not fall in value, whilst also providing the exposure to equities that is required to achieve growth above inflation. The appeal of these products has increased due to the recent volatility in world stock markets.
Product providers argue that we insure our cars, houses, boats, and pets, so why not insure our savings and pensions as well? The counter argument is that the drag on a portfolio caused by an annual insurance charge can be significant in the medium to long term.
We could ask if guaranteed products have a valuable role in a well constructed investment portfolio?
And then there is the issue of peace of mind. This is an important commodity for many investors, the value of which can be difficult to quantify. Conversely, the effect of a small annual percentage charge on long-term growth of an investment portfolio can be difficult for a client to comprehend.
Research does, however, show that the fear of loss is a far stronger emotion than the potential for growth.
These contracts allow people to remain fully invested up to their selected retirement ages and this means they can benefit from growth they would have missed out on had they switched to lower-risk assets in the run up to retirement.
People’s circumstances are likely to change over time and new products may become available in the market place. A guarantee that might prevent movement should be viewed with caution, as it may prevent a more suitable product being recommended in future.
There are extra costs involved with guaranteed products that should be considered carefully if they are to be seen as an alternative to a pension annuity purchase as part of the advice process. If they are explained in terms that people can understand, these guarantees give valuable benefits to the retiree.
With the ever changing face of the retirement market guaranteed products as an option to pension annuities are not only here to stay but will continue their advance in the UK marketplace.
