Personal PensionJul 14 2014

Providers defend cost of ‘irrelevant’ pension guarantees

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Providers of unit-linked pensions which are expected to see substantial sales growth off the back of the Budget changes have defended costs of up to 1.5 per cent a year, in the face of fierce criticism from two pension experts that the products may offer little to no value for savers.

Both Mike Morrison, head of platform marketing at AJ Bell, and Tom McPhail, head of pension research at Hargreaves Lansdown, warned unit-linked guarantees do not offer savers value for money.

The three main unit-linked guarantee providers in the UK, Aegon, Axa Life Invest and Metlife, said their guarantees cost between 0.95 per cent to 1.5 per cent.

Unit-linked guarantees are products written under drawdown rules and positioned in the middle ground between conventional annuities and income drawdown. The products offer some guarantee over income or capital values while allowing a fund to remain invested.

It has been widely touted that the sector is set to boom in the coming months ahead of sweeping changes that could push savers away from discredited annuities, with Partnership confirming it is looking at a launch and Prudential, among others, thought to be doing the same.

Mr Morrison said: “Unit linked guarantees can add significant extra cost to a product so it is important to understand how they work and the extra cost (the insurance premium) they add to the total cost and the circumstances in which the guarantee will be needed.”

Speaking to FTAdviser, Mr McPhail, said: “I think that [1 per cent to 1.5 per cent] is a pretty high price to pay for a certainty that most people do not need most of the time.

“Most of the time, most people do not need a guarantee. It might bring some comfort but at 1 per cent a year, this comfort is a waste of money.

“Consumers should plough that into their pension or just stick it in a tracker rather than pay 1 per cent a year for guarantees you don’t need. It may be useful in certain scenarios i.e. at the point of retirement.

“I think it is just dead money and wasted money. Guarantees have very little relevance to the vast majority of pension savers.”

However, providers have hit back stating that clearly there would be a cost in providing a policy holder with the security and peace of mind that unit-linked-guarantees offer and that this could offer good value for savers.

Gavin Casey, distribution director at Aegon, described Aegon’s charges as comparing “very favourably with a number of solutions that leave investors naked when markets are difficult”.

He said: “If you take the example of a 65-year-old, we give them the certainty of a guaranteed income of 4.25 per cent for the rest of their life and, when markets perform, policyholders may lock in permanent increases to that income level.

“Today’s 65-year-old male has a more than a one in four chance of living to 95. That is some promise.

“If they invested for a guaranteed lifetime income, choosing our defensive managed risk portfolio, our typical investor would pay just 1.05 per cent in total, or 1.3 per cent if you include a guaranteed death benefit.”

Investors with Axa Life Invest UK would pay a guaranteed income charge of 0.95 per cent to 1. 5 per cent for the single life option or 1.4 per cent to 1.7 per cent for the joint life option.

Simon Smallcombe, managing director of Axa Life Invest UK, claimed that price is only an issue “in the absence of value”.

He said: “When we offer a client a completely transparent charge that shows the value of certainty, it is an informed decision of the client and advisor. Guaranteed drawdown is naturally more expensive than retirement savings products that do not offer a guarantee.

“The guarantee acts as an insurance on your retirement income, giving you peace of mind that you will receive a minimum level of retirement income that you will not outlive.”

Mr Smallcombe added when the global financial crisis hit in 2008 and people saw their retirement income pots drop by 40 per cent, clients preferred to pay 1 to 2 per cent to protect themselves and guarantee their future incomes.

He also pointed to his firm’s ‘pensions index’ survey, which he said found “76 per cent of people would be willing to pay 1 per cent towards their pension pot in exchange for a guarantee on how much retirement income they would receive”.

He continued: “It is clear that people value certainty – and are willing to pay for it.”

Charges on MetLife’s capital guarantees start from 0.35 per cent while on the income guarantee product they range between 0.95 per cent and 1.2 per cent.

Dominic Grinstead, managing director at MetLife, said: “Guarantees deliver certainty for clients and the possibility for growth and are ideally suited to the new pensions regime.

“Research among advisers for Dr Ros Altmann’s report flexibility in retirement found 60 per cent of financial advisers want to see more products offering guarantees on income and capital and MetLife estimates the market could grow to around £4bn a year from the current £1.2bn to £1.5bn by the end of 2015.

“We enhanced our products earlier this year to introduce market-leading deferred income rates and shorter capital guarantee terms in response to adviser and client demand.”