Say hello to our flexible friends

As Joe Public’s attitude to retirement changes, many people have abandoned annuities in favour of pension drawdown.

One of the reasons for this has been the perceived poor value of annuities and the greater flexibility provided by drawdown. However, annuities are still one of the few financial products that can provide a safe and secure income for retired investors and as new product developments for pension income - such as flexible annuities as well as impaired and enhanced annuities are launched - new life has been breathed into the sector.

As these new 'annuity-styled' products have washed across the Atlantic from the US to the UK's shores, many have questioned how appropriate these third-way products, or variable annuities, are to the UK market.

In the past, you were faced with basically two choices: pick a conventional annuity, tie yourself down to a fixed rate for life or if you did not want to lose your capital, opt for income drawdown and put your hopes in the markets. In contrast, variable annuities provide a guaranteed income in early retirement, enabling people to keep their income options open and still receive some upside potential on their investments.

However, three years after entering the UK market, variable annuities are still somewhat of a foreign concept to advisers and it has only been recently that product providers have come to the party, launching these third-way styled products.

In 2006, Aegon became the first European insurer to import the 'variable annuity' concept from the US and one of the main challenges they cited at the time of launch was trying to convince advisers to push the product.

Up until last year, The Hartford was one of the few product providers to provide a UK version of a variable annuity. However, recently Standard Life has revealed plans to launch a variable annuity proposition which will sit exclusively within the firm's Sipp wrapper rather than being a stand-alone product with providers Axa and Prudential also expected to follow suit with their own 'third-way' products.

While product providers are increasingly experimenting with variable annuities, many IFAs, however, still regard these flexible products as somewhat of a foreign concept. According to figures from NMG Consulting, 41 per cent of IFAs have never heard of variable annuities and only 13 per cent claim to have a 'reasonable understanding' of them.

Due to this, the consensus in the industry - from a provider's perspective - has been to keep variable annuity products simple and avoid the complicated products launched on the other side of the Atlantic.

Tony Foulkes, financial planner at Jonathan Fry & Co Ltd, sees variable annuities as offering a very different prospect from the more traditional annuity, which in the last few years has been much criticised for its lack of flexibility. He said: "For people who are relatively young when taking benefits, want a reasonable amount of control over their finances and are willing to accept some form of investment risk in exchange for the potential for further growth then the new third way products will provide an attractive solution. They are not likely to work well for the older retiree and do not suit the risk averse."