Variable annuities have been available in the UK for little over two years and the signs are that they are growing in popularity.
I believe that there are many reasons for this growth that have serendipitously occurred over the recent past and which have thrown the benefits of VA's into the spotlight.
Firstly, the product providers have gone to great lengths to build awareness and profile for their products - with advertising, training, seminars, press coverage etc all used to great effect. There can't be an IFA in the country who's active in the in/at retirement market who hasn't been "touched" by this activity.
Secondly, there's the real lack of alternatives available for those clients who want or have to retire. Conventional annuities are not only inflexible and irreversible but also maybe ineffective at keeping pace with inflation; and there's the rates themselves - conventional annuity rates have been falling for some time and there's nothing to indicate that this decline is going to stop, let alone, be reversed.
Then there's the investment market: many clients will have seen the value of their pension pot fall over the past few years or so and the current value, coupled with low annuity rates, means that many can't afford to retire. Of course, there's drawdown to be considered as well, but these clients will have the memory of stock market falls fresh in their minds and may well be very wary of leaving their actual retirement income to the vagaries of the world's stock markets. These things have all conspired to fuel the growth of the variable annuity market here in the UK. They do allow the client to remain invested and thus benefit from any recovery in the markets but in case they fall again, the VA offer a guarantee option that allows the client (and his IFA) to sleep soundly. Yes, the guarantees do have an additional and explicit cost, ours is 0.95% a year but, for a client who may have experienced a fall of 30% or more in his fund value in the last year, that increasingly looks like a cost worth paying.
One way of looking at it is this. Most VA contracts are essentially, drawdown (or unsecured pensions, to give them their post -A-day title) products. The difference between a VA and a "vanilla" drawdown is the availability of either a capital or income guarantee. As an adviser, facing a client looking for help to retire and get a fair level of income both now and in the future, drawdown has benefits over a conventional annuity - the primary one being the chance to remain invested and benefit from market recovery when it happens. If the adviser can offer the client all the benefits of drawdown but, with the added security of an insurance that his income won't fall below a set level, that has to be the icing on the cake and that's why a VA is a better option than a "plain" drawdown and also why variable annuity sales have prospered in the current climate.
Furthermore, Lincoln i2Live is also available as a flexible annuity which means that a client can transition seamlessly through the age 75 barrier and maintain the same investment strategy, benefits and income guarantee.
As one adviser put it "at the start, you'll know the value of your first cheque and you'll know the value of your worst possible cheque."Simon O'Connor is Head of Products and Marketing, Lincoln Financial GroupIFAonline
Three years at Wells Fargo
Effective from 9 December 2019
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