Shape of annuities to come

Temporary and investment-linked annuities have been available for some time and Richard Williams, director of The Annuity Bureau from JLT, says these vehicles should always be considered as part of any advisory process.

It will be interesting to see how annuity products further develop post-April 2015, says Mr Williams, especially in light of the changes to remove annuities from existing shackles and as providers attempt to respond to the challenges of more flexible drawing and the lure of cashing out.

Given the bad press, Mr Williams says it is highly likely that the term “annuity” will gradually disappear from the market, although a guaranteed income product will always be suitable for some people and it is likely that new products will be developed that include an element of guaranteed income within their structure.

As a result of this flurry of activity, Mr Williams says one concern that has arisen is that the market will be flooded with complicated products that create inertia due to lack of understanding, even with the creation of the new guidance guarantee.

With regard purely to annuities, Mr Williams says he expects to see providers launching guaranteed income products with longer attaching guarantee periods; and the development of annuity type income products that include a life event change facility.

It is also likely that, over time, the mindset of retirees will change, Mr Williams adds.

While people are currently conditioned to expect an income in retirement from their pension, Mr Williams says the new flexibility rules could create a ‘dash for cash’ and that has to be managed carefully to avoid people running out of funds during their retirement.

To combat this, Mr Williams says he also foresees products being available that incorporate an element of guaranteed income with the ability to take more flexibility with funds outside that function, either in the form of drawdown type investments or instant access cash.

Pensions Liberation is a term that has been high on the agenda recently, and Mr Williams says it is likely to be even more prominent in the future as the new flexibility could create an environment where it is easier to entice people with bogus investment products.

Mr Williams says: “Care will have to be taken to monitor all of the scenarios created by the new environment and the one certainty is that there has never been a greater requirement for advice leading up to and at the point of retirement.”

In terms of the new shape of annuities, Alan Higham, retirement director at Fidelity Worldwide Investment, says you can expect money back guarantees in that, if you die before having all your capital repaid, then the balance will be paid to your estate.

Other options will be fixed term deals over five, 10, 15, 20 and 25-years, Mr Higham predicts. He says these fixed term deals would not pay out for life but, instead, would pay over a fixed term regardless of how long you live.

There are two main variations Mr Higham expects: guaranteed payment levels and payment levels that are adjusted based on actual investment returns.

Mark Stopard, head of product development at Partnership, says he anticipates there will be greater freedom to design products around consumers’ increasingly diverse needs. He says you may see products which offer ‘step downs’ (lower income in later life) or ‘step ups’ (higher income when people stop work).

There may be others which provide an element of guaranteed income but allow some of the fund to be invested to bolster returns, Mr Stopard adds.

“Going forward instead of a choice between annuity and drawdown, the advisers’ job will be to combine different elements to best fit their clients’ income requirements.”