Aegon has rolled out a drawdown product on its platform, which combines the key benefits of both an annuity and flexi-access drawdown.
In April, FTAdviser revealed the product launch, which Aegon chief Adrian Grace said would see “guaranteed-style” products put on Aegon’s Arc platform and would be a “UK first”.
Launched today (20 July), the product called ‘secure retirement income’ has been designed to meet growing demand for flexibility and income certainty, providing an alternative to an annuity or flexi-access drawdown, “both of which have limitations”.
Speaking to FTAdviser, Duncan Jarrett, managing director for retail at Aegon UK, said that there were two major trends seen since April.
“One is that annuities have still dropped and are down around 60 per cent when looking at statistics across the industry, while drawdown is going up - Aegon’s own drawdown business has doubled in that period.”
He added that from a customer’s perspective, “rightly or wrongly”, annuities are being perceived as poor value.
“The income certainty they offer is really the value, but the inflexibilty, particularly around death and the passing of the asset back to the insurer, is one of the main issues. The contrast of that is the drawdown side, which gives the flexiblity and allows the assets to be passed on, however the guarantee of the income is not there.”
The ‘third way’ product has the benefit of both annuities and drawdown, Mr Jarrett said, stating that customers keep their pension invested with the potential for growth, but Aegon provides a guarantee on the minimum income they will receive.
The guaranteed minimum income for life is 3.2 per cent for those who start taking an income at 55 years old and 4.05 per cent for those who start at 65 years old. In the event of death, funds can be passed on to beneficiaries and additional death benefits can be selected.
Mr Jarrett said: “From speaking to advisers, they see this as a real chance to engage with customers to give them the maximum flexibility. I think the key reason being they can use this to mix this with other types of investment within drawdown.”
It has been widely touted that the ‘third way’ sector is set to boom in the coming months with other providers looking at launches.
However, one criticism of these products is the cost. ‘Secure retirement income’ offers two Aegon SRI managed volatility funds – cautious and conservative – which have typical equity weightings of 40-45 per cent and 30-35 per cent respectively.
The service charges are 0.53 per cent for fund management, 0.3 per cent for product, plus an explicit guarantee charge between 0.9 per cent and 1.55 per cent depending on whether death benefits are selected, meaning total charge between 1.73 per cent and 2.38 per cent.
Tom McPhail, head of pensions research at Hargreaves Lansdown, told FTAdviser that while the product will have some appeal to IFAs, the guarantee charge will be around 1-1.5 per cent, which “raises some interesting questions”.
He said: “Throw in adviser costs and distribution and you are looking at a ballpark cost of 2.5 per cent to 3 per cent. I am not convinced it [this product] does a better job than splitting the pension between a separate drawdown product and an annuity, which would be cheaper.”
Mr Jarrett responded: “There is a cost to providing a guarantee, but we believe that there is also a clear benefit for customers, which means that should they be unlucky enough to retire into a market downturn, they can sleep easy in the knowledge that their income is protected whilst retaining flexibility over their savings.”
donia.o’loughlin@ft.com
