'Money back annuities' are likely to change the shape of the annuity market for ever if approved by ...
'Money back annuities' are likely to change the shape of the annuity market for ever if approved by The Treasury, says Peter Quinton, managing director of independent annuity specialists, The Annuity Bureau.
As well as pointing out that product design must remain simple, The Annuity Bureau cautions life offices to ensure that the drop in income people will receive if they opt for the money-back annuity is small enough for the product to remain attractive.
Initial designs for the new product from Norwich Union suggest the income generated for a male aged 65 is likely to be 5% less than the income they could receive via a traditional pension annuity.
Proposed money back annuities that are now being promoted by Prudential and Norwich Union will allow pensioners who die soon after the purchase of their annuity to leave the remaining amount of their original capital to their heirs.
However, Quinton points out there are already products on the market which would provide the framework for money-back annuities.
"What many commentators have overlooked is that money back annuities have existed for some time in the form of purchased life annuities - an annuity that you can purchase voluntarily with your own money in order to supplement your income," says Quinton.
"There are likely to be differences in the taxation of the payment of income on death between the purchased life annuity and the proposed money back pension annuity. However, the fact that we already have a structure in place should mean that the money back pension annuity can become a mainstream product without undue delay - and not before time."
Although interest in the new product is already strong, Quinton says the industry must also learn from past experience that some products which initially sound like a good idea could still be ignored by the consumer.
"Providers should not forget the experience of Providence Capitol when, in the early 1990s, the firm launched its Capitol Preservation Plan - a packaged annuity linked to life cover. The product flopped because the reduction in income between what you would get with the money back guarantee and what you would get without it, was too great. This was when annuity rates were at an all time high," adds Quinton.
"I believe people may live with a 5% drop in income if they feel they get a good guarantee in return (£7,900 a year instead of £8,400 for a male aged 65 with £100,000). We must remember that people - especially those on lower incomes - generally want to earn as much money as possible, so the product must be geared accordingly."
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