These life stages post-retirement can be categorised in a variety of ways but we at Defaqto define them as: active, passive, assisted and supported. Assumptions will need to be made and agreed about the likely length of time that the client may experience, and on the spending needs, within each of the four phases. The client’s health, lifestyle and family commitments should be taken into account.
Where unit-linked guaranteed products are positioned
The universe of retirement income products available for selection in the mainstream retail pension market is expanding and is now acknowledged to include the following types:
• Conventional annuity
• Underwritten annuity
• Invested annuity - unit linked or with-profits
• Fixed term annuity (written under drawdown rules)
• Income drawdown - capped and flexible
• Unit-linked guaranteed products
From a ‘risk’ and ‘flexibility’ perspective, ULGPs have been positioned in the middle ground between conventional annuity and income drawdown. When accessed via a personal pension or income drawdown wrapper they fall under drawdown legislation from a retirement income planning perspective.
Advisers who are seeking to offer a comprehensive retirement planning service need to ensure that they understand the market positioning of these and other retirement income products, as well as their key features.
Importantly, advisers also need to show how they have arrived at their final choice of product solution and hence this may also involve confirmation of why other solutions have been ruled out of contention.
While historically the industry has debated the merits of these products against each other in order to arrive at the ‘best’ solution, an increasing number of advisers are successfully using some of these retirement income products in conjunction with each other to meet clients’ retirement requirements.
The following diagram illustrates the core retirement income options available to clients with maturing pension pots. Advisers can get an overview of associated flexibility and investment exposure with these products and they can also see where products might overlap:
As unit-linked guaranteed products represent a specialist segment of the market, the number of providers is relatively small. While these products, often referred to as a ‘variable annuities’ or ‘third way products’, have proved popular in the US and Japan, there are still only three providers currently operating ULGPs in the UK.
Towers Watson has been reporting on the size of the UK ‘variable annuity’ market since 2007 and their figures suggest that sales rose to almost £1.42bn in 2012 - an increase of almost 30 per cent over 2011. Furthermore, variable annuity policy numbers had also risen in comparison to 2011 to 16,200 in 2012 - an increase of 19 per cent.
Pension/investment product wrappers for ULGPs
