There seems to be a feeling in the industry that new fangled annuities are bringing fresh doubts. They are being billed as a revolutionary product for security conscious babyboomers, but the introduction of US-style variable annuities has not been smooth. They have been knocked as too expensive, with guarantees that aren’t needed, and now critics are attacking the language that insurers use.
Variable annuities, which are also known as third way annuity products, were brought over from the US by providers such as the Hartford, Met Life and Lincoln. The idea behind them is to offer a guaranteed income in early retirement, while allowing people to keep their income options open and still receive some upside potential on the performance of the still invested fund.
Many of the UK’s big insurers, Prudential, Aegon, Standard Life, for example, have been pinning their hopes on the new products, but some industry figures have been critical.
Each insurer tends to use its own language to describe and promote it’s own variable annuity product, so when a potential investor first comes to try to decide on which, if any, of the products to use, they will typically end up with two, three or four product quotes and each one is describing a largely similar product but in completely different language. Investors had no hope in comparing products which even financial advisers with appropriate qualifications could not compare.
The increasing number of players in the variable annuities market should have a knock-on effect on variable annuity rates – which have been criticised as expensive – and potentially catalyse a new wave of more affordably priced products.
Looking at how income drawdown products have evolved, it is likely that the arrival of Standard Life, with its ‘large distribution reach’ would drive the market to offer more competitive rates. Income drawdown was and is a good idea but they were expensive initially.
Industry data suggests that it will be a while before variable annuities reach that point. Research published earlier this summer by Fidelity showed that there is only a 1 in 70 chance of the guarantee provided by variable annuities being needed. Or as Fidelity put it: ‘There is more likelihood of flipping a coin the same way up seven times in a row’.
Both Standard Life and Prudential have delayed launching their products, despite announcing likely launch dates. Legal & General has yet to launch into the market and has criticised the complexity of existing variable annuity products.
