Should you be considering investment linked annuities or conventional annuity rates, that is the question. For investment-linked annuities the main factors are the likely asset-backed investment return and how long the client is expected to live in their retirement. These arrangements are less sensitive to bond yield changes and will also be affected less by Solvency II. From an advice perspective this has the potential to make investment-linked annuities an attractive option to those about to retire. Though underwriting in the annuity market is becoming more client specific with more individual underwriting coming through, it is not uncommon to find the required yield to match an equivalent conventional annuity is around 4% a year or perhaps even lower, which retirees who have an appetite for some investment risk are able to consider.
Many clients are also prepared to take on some additional risk and take an even higher level of retirement income than this. Although the increased risk needs to be fully considered this is actually understandable because, quite often, new retirees will still be young and active and will potentially require more retirement income than later in life. Most investment linked annuities cater for this by providing the facility to reduce income at a later date.
One additional advantage of investment-linked annuities is that they can help spread risk. For example by accepting an element of investment risk, the client has the potential to have an increasing retirement income and therefore reduce the inflation risk which they couldn’t have done had they bought an annuity with level conventional annuity rates. It may also be that a higher level of starting retirement income could allow the retiree to build in an element of spouse’s pension benefits, which they simply couldn’t have afforded by using a conventional annuity arrangement.
