New demand for with profits annuity contracts
With the increasing longevity we are witnessing one major pension annuity provider, Legal & General, is predicting an increasing demand for their with profit annuity contract. They believe independent financial advisers (IFA’s) will see this contract as an alternative to conventional annuities where the retiree is prepared to accept a degree of risk.
They might have a point, but we are seeing turbulent stockmarkets around the world, and this does, and will, have an effect on the performance of with profits funds linked to this form of pension annuity. A significant downturn can have a dramatic effect on future income from this form of pension annuity. There are no guarantees on performance.
To help, L&G has produced a guide to the products for advisers to use with their clients, which includes a calculator to estimate the potential impact of inflation on income.
Head of annuity product development for L&G’s individual annuity business Tim Gosden says: “People may have to rely on their pension for 20 years or more. This is a long time to live on a fixed level of income provided by a conventional annuity, particularly given the likely impact of economic changes over that period. Exposed to the ravages of inflation, a customer’s pension income could soon become insufficient to cover increases in the cost of living.”
L&G says that even during a period of low investment returns, the income from a with-profits annuity will not fall below the minimum guaranteed level set at the outset, although additional investment returns are not guaranteed so this presents a degree of risk. All this means is that the retiree has to be careful, and understand the risk involved related to future performance and income.
But L&G says the effect of smoothing means that in turbulent market conditions income stream is less susceptible to dramatic fluctuations in value.
