The industry should rethink the way it integrates risk in retirement planning and innovate around the mid-range of the spectrum, a provider has said.
Russell Warwick and Kim Lerche-Thomsen, managing director and chairman of retirement provider Primetime Retirement, said the market was too focused on matching risk-rated consumers with products at either end of the risk spectrum: lifetime annuities and drawdown.
It would help the retirement income market if more attention was given to solutions that sit in between, such as fixed term annuities, they said.
The Financial Conduct Authority (FCA) and government have called for more product innovation since the pension freedom reforms in 2015, saying they wanted to see more products for the mass market that would combine flexibility with an element of guaranteed income.
There was a brief flurry of activity around guaranteed drawdown but all providers apart from Prudential, which is able to keep costs down by providing the underlying guarantee using its own funds, have now exited the market.
Mr Warwick said: “The industry is still quite poor in getting under the skin of risk planning in retirement.
“They are thinking about higher and lower risk customers rather than mortality and investment risk.
“The regulator is constantly flagging innovation between drawdown and annuities and we like to think we are doing just that.”
Fixed term annuities were invented about 10 years ago and can be taken out for anything between one and 25-year periods, during which they pay a pre-agreed income and capital sum at the end of the term.
They carry some longevity risk as, unlike lifetime annuities, they don’t provide a secure income for life but they don’t carry the investment risk of a drawdown solution as they offer a guaranteed income and lump sum at the end.
Fixed term annuities, which are currently offered by Primetime Retirement, Legal & General, Canada Life and LV, have seen an upswing since the pension freedoms and are currently estimated to represent about 10 to 15 per cent of annuity sales.
Mr Warwick said: “Post pension freedoms the market has grown but our view is it is not growing quickly enough. We think it is reasonable it should represent about 30 to 35 per cent of the overall market.”
But rival provider Retirement Advantage, which innovated around its proposition following the pension freedoms, disagreed.
“We don’t see the market demand for fixed term annuities,” said head of media relations Paul Keeble.
The firm is unique in that it offers a guaranteed lifetime annuity, pension drawdown facilities and a cash account in its retirement account all within a single tax-advantaged wrapper, and allows clients to reinvest their annuity income through their drawdown product.
Mr Lerche-Thomsen believes fixed term annuities are particularly valuable in the early stages of retirement, where they can act to mitigate sequence of return risk and give people certainty of income and the flexibility of receiving the cash back at the end of the agreed period.
Paul Stocks, financial services director at Dobson & Hodge, said he could see how the products might work for some people but added he was concerned about adding “layers of cost” and risk in later life.
He said: “There is a cost involved and whilst you are effectively insuring away some risk, it is in what circumstances that risk exists and it needs to be managed accordingly and the costs justified.
“If a client genuinely needs a temporary income, perhaps higher for a number of years, then this could make sense but for those seeking secured long term income, which is what an annuity is all about. You are reintroducing risk and having to make decisions when they are 10 years older.”
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: "In my view, for most people, a fixed term annuity is simply an investment in very low risk assets with only the tiniest mortality kicker.
"There are tax reasons why this might be appealing in some European jurisdictions but for those resident in the UK it's unlikely we recommend them."
carmen.reichman@ft.com
