Advisers give too much weight to charges when assessing unit-linked guarantees and often fail to understand their value as a hedge against outliving retirement savings, a study suggests.
A report for Metlife Europe concludes advisers need to be aware no single product can be suitable for all in the retirement market, adding guarantees can add value “as well as peace of mind”.
According to the study, entitled Unit-Linked Guarantees - Managing Risk in Retirement, the key factor in the success of the products in the UK remains investor attitude to risk.
Metlife says the transparency of charges on unit-linked guarantees - which range between 0.5% and 1.75% - can leave the products open to criticism on costs.
But the report finds the UK market is not used to transparent charges and tends to ignore the implicit charges for guarantees in products such as conventional annuities.
Report author Nigel Balchin says advisers do not have a full understanding of the importance financial strength and hedging expertise plays in guarantee pricing.
“Guarantees do clearly have a value to the individual investor,” Balchin says. “That perceived value may change from time to time, particularly as the individual approaches retirement when it may become more valuable to them.
“What is clear is that in the retirement market there is not one product suitable for all. In an ideal world guarantees would not be necessary but in reality whilst the average investor may never see his guarantee in financial terms, for those that do, the guarantee undoubtedly adds value as well as peace of mind.”
The report also urges the industry to agree on a definition for unit-linked guarantees and challenges the term ‘variable annuity’ as a misnomer, arguing the products are often neither variable nor annuities.
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