Where next for that variable annuity, with all the changes that have gone on recently? These variable annuities, or third way annuities, have been available in the UK for just over two years and the signs are that they are growing in their popularity. Watson Wyatt, leading consultants, have been tracking the market and their figures illustrate that in 2008 sales passed the £1billion mark. Early indications for this year suggest that this trend will continue, despite the market volatility and the dark recession we are witnessing.
There are good reasons for this growth. First, the product providers have gone to great lengths recently to build awareness and profile for their various products – with advertising, seminars, press coverage, and the like all used to great effect. There can’t be an independent financial adviser (IFA) in the country active in the at retirement market who hasn’t been reached by this information about variable annuities.
Secondly, there is a real lack of alternatives available for those people who want or have to retire. Conventional pension annuities are not only inflexible and irreversible but they can be ineffective at keeping pace with inflation; and then there’s the annuity rates themselves, which have been falling for some time now and there’s nothing to indicate that this is going to stop or be reversed.
Then of course we have the investment market: many people will have seen the value of their pension fund fall over the past few years and the current value, coupled with low pension annuity rates, means that many can’t really afford to retire. Of course, there’s income drawdown to be considered as well, but these people will have the memory of stockmarket falls pretty fresh in their minds and may well be very wary of leaving their retirement income to the vagaries of the world’s stockmarkets.
All these things have all conspired to help the growth of the variable annuity market in the UK. These contracts do allow the client to remain invested and therefore benefit from any recovery in the stockmarkets but in case they fall again, the variable annuity offers a guarantee option that allows the client to sleep soundly. Yes, the guarantees do have an additional cost, but, for a client who may have experienced a fall of 30% or more in his pension fund value in the last year, that does increasingly looks like a cost worth paying.
Most variable annuity contracts are essentially income drawdown products. The difference between the two is the availability of either a capital or an income guarantee. As an adviser, facing that client looking for help with their retirement planning and get a fair level of retirement income both now and in the future, income drawdown has benefits over a conventional pension annuity - the main one being the chance to leave a fund invested and benefit from market recovery as and when it happens. If the adviser can offer that client all the benefits of income drawdown with the added security of an insurance that his income won’t fall below a certain level, that has to be the real icing on the cake.
In this market, Lincoln i2Live is also available as a flexible annuity contract which means that a client can travel seamlessly through the age 75 barrier and continue with the same investment strategy, benefits and that income guarantee. So, when you’re on the look out for your annuity quotes, you might want to check this out.
