The costs of new style variable annuity pension products coming out from the pension industry are not appropriate, according to a report from Fidelity. This research reveals that there is only a 1 in 70 chance of the guarantee being needed.
Last month Aegon became the first UK insurer aiming to give savers what appears to be the best of both worlds – the opportunity to guarantee an income in retirement without committing to a lifetime annuity. These so-called variable or third way annuities have already taken the US by storm and US providers such as The Hartford have already made inroads into the UK market, albeit only in a small way so far.
But while the products’ pledge to hedge against longevity, inflation, liquidity and asset allocation risks will appeal to security conscious babyboomers, there is only a 1 in 70 chance of the guarantee being needed, the research found.
‘To put this into perspective, there is more likelihood of flipping a coin the same way up seven times in a row,’ the report by Fidelity International said.
The report: ‘The nature of financial risk in retirement: are guarantees the answer?’ investigated the probability that guarantees would be called upon and the sort of benefits they would generate relative to their cost.
The report found that the average cost of a guarantee is around 1%, giving a total annual management charge of 2.5%. But when the product is invested fully in equities, the AMC (annual management charge) increases to around 3.5%.
‘Even using simple interest, a charge of around 3.5% would erode more than half of the original capital over 15 years,’ the report said. ‘Add in the 5% withdrawal and it becomes questionable how much cover there is for the liquidity risk.’
One independent financial adviser (ifa) has said: ‘If it’s income you’re worried about, you should be insuring the income. The only way to insure the income is to buy an annuity.’
Meanwhile most consumers did not have any sense of how much it would be appropriate to pay for this type of guarantee. ‘People who do not have to rely on guarantees should take a long hard look at the costs,’ the report said.
The message is clear; think carefully and seek specialist advice if you are considering a new style variable annuity for your pension planning.
