Extended guarantees hailed as annuities’ saviour

Extended guarantees hailed as annuities’ saviour

Intelligent Pensions has hailed the government’s move to remove 10-year restrictions on guaranteed term annuities as a saving feature of the annuity landscape in the run-up to the pensions overhaul.

As part of the pension reforms, the government lifted the 10-year restriction on the guaranteed period that some annuities had. This means that the annuity income continues to be paid even if the annuitant has died during an initial period. Until now, the guaranteed period could be no more than 10 years; however, this limit is removed from 6 April 2015.

Speaking today at FTAdviser’s Retirement Freedoms Forum, David Trenner, technical director at Intelligent Pensions, believes annuity guarantee extensions may potentially change the landscape of the annuity market from its current lows.

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Since the radical pension reforms were announced at last year’s Budget, annuity sales have taken a battering with most providers reporting falls of at least 40 per cent.

Mr Trenner added the extension will give those who buy an annuity more reassurance as if they die earlier than anticipated, the remaining years of the guarantee can be passed to be a beneficiary.

However, Andrew Pennie, marketing director at Intelligent Pensions, told FTAdviser, that the trade-off for the longer guarantee is that consumers will get a “reduced income from day one to cover the cost”.

Mr Trenner said: “We are now in a situation where you can buy a 15-year guarantee, a 20-year guarantee and even a 25-year guarantee.

“Now at 65 based on some figures which I have obtained, a 15-year guarantee will give you roughly 90 per cent of the income of a no guarantee policy and will guarantee 90 per cent of the capital.

“So if you die no they aren’t going to keep all your money [as people have feared this] - they will keep paying it to your beneficiaries.

“Now if you said to people who are saying ‘I don’t want to buy an annuity, I know someone who died and the insurance company kept all the money’, well there is your solution and it’s been slow to happen but I know at least one provider is working on a product that will give these guarantees.”

Elsewhere, James Rainbow, head of UK financial institutions and strategic accounts at Schroders, said that he didn’t believe product proliferation changes what an adviser needs to do, but that advisers will be able to choose from a bigger product menu.

“I think that the reality of these changes and the impact on this market may have been overstated to a degree.

“In 2012 there was something like £14bn worth of annuity contracts written and I think the initial read through has been to transfer or to delete the word annuity and say something else largely investment-based.

“I think there will be some product innovation but it is going to be in a world which is much more modest.

“I think annuities will be a perfectly valid place for a great many people and the number of people who actually end up using these freedoms and choices is going to be nothing like the £14bn that was previously annuitised.”