We are living longer and therefore having a greater dependency on the state pension and a pension annuity. In 1950, around 16 per cent of the UK population was aged 60 or over. By 1980, that had increased to 20 per cent and by 2030 around 25 per cent of the population will be 60 or older. Retirees and those approaching retirement and the time to buy that pension annuity need to look at the likely life expectancy of others of their own age.
Between 1981 and 2005, life expectancy in the UK as a whole increased by four years for 65-year-old men and 2.8 years for 65-year-old women. As a nation, we have greater life expectancy in retirement.
The Pensions Policy Institute produced a pensions facts document in February, using data from a wide variety of sources. These figures tells us that, for 2005/06, the average proportion of pensioner income paid from the state, including retirement pensions, disability benefits, pensions credit, etc, was 55 per cent and this figure has remained pretty much constant since 1997/98.
According to the Office for National Statistics, already around 19 per cent of the total population is aged over state pension age and that is projected to increase to 21 per cent by 2050, even after allowing for significant increases in the SPA which come into effect before then.
All this, and other factors in addition, is the background against which a number of providers, including Met Life, Aegon, The Hartford and Lincoln have, over he last two years or so, launched so-called third- way annuities into the UK.
These contracts, under their American name of variable annuities have been hugely successful in the US and Japan. In effect, they are a form of hybrid of annuity and drawdown contracts allowing the annuitant to benefit from a guaranteed level of income while still investing in the stockmarket with the potential for growth which would increase the guaranteed income payable.
The models of third-way products are different from provider to provider as well as country to country. What they have in common is the presence of some form of “guarantee” in the form of lifetime income or availability of capital at some point in the future.
Actuarial consultancy Tillinghast Towers Perrin estimates that inflows into variable annuity products will reach £70bn by 2016. Broadly, the obvious attraction is continued exposure to the market to benefit from the potential for growth while protecting the fund/income from potential downsides.
The cost of these products has been used as a reason for not recommending them. Obviously, the charges for this type of contract will be higher than for investment vehicles which do not protect against downside risk but any form of insurance comes with a premium.
The current market volatility and, to some extent, the slowdown in the housing market combined with the credit-crunch, which make a reliance on equity release less certain, mean this is an attractive concept for today’s market. The US experience suggests that it is equally attractive in all market conditions so it may well be here to stay.
