To answer this conundrum we commissioned Millimans, a global actuarial consulting firm, to conduct an independent review of the UK retirement income market and whether guarantees really do offer customers better value for money.
The brief
The study was one of the most comprehensive undertaken and covered a wide range of products currently being sold in the UK market.
Investment performance has to deteriorate considerably and stay that way for some time for the guarantees to actually provide more income than a product without a guarantee.The purpose was to analyse how well these met the income requirements for three example customers, each with a different perspective and spending pattern, under a variety of economic and market conditions.
The basics
It won’t surprise you to hear that there was no single product that met each of our example customer’s requirements.
The products with the highest level of guarantee place the most significant restrictions on the financial freedoms of a customer.
As customer circumstances change over time this could restrict the ability to meet financial needs so retaining flexibility to respond to these changes is important.
The bill
The higher charges and more conservative investment strategy used in guaranteed products can significantly reduce the amount of money customers get back.
The study found that a product with only a modest guarantee returns around 30 per cent less over the average retiree’s lifetime than a similar product with no guarantees.
Guarantees are of most benefit in adverse market conditions but the extent of that higher income during these periods can be a lot smaller than many perceive and investment performance has to deteriorate considerably and stay that way for some time for the guarantees to actually provide more income than a product without a guarantee.
And in terms of money back to the customer across their retirement the study found that a drawdown approach with no guarantees delivered 25% more than a drawdown with a guarantee.
The balancing act
Guarantees are essentially a trade-off between financial freedom and investment growth versus security and the point at which the trade-off becomes worthwhile, if it does at all, will depend on the customer and the product.
The bottom line
The issue is of course that while drawdown can deliver better value for money than a guarantee it also brings with it the risk of running out of money too soon.
The good news is that there are now tools and investment strategies available in this space which can help you to explain how likely this is for your client and ensure that they don’t run out of money in retirement.
If you want to find out more please speak to your usual Sales Consultant.
Lorna Blyth is investment marketing manager for Royal London
