Aston Goodey discusses the potential impact of third way products
Recent proposed rule changes mean that retirees have more flexibility than ever before when it comes to taking their retirement income. Do you feel this will lead to increased interest in alternative products?
We have already started to see a move towards alternative products in the retirement income market. This has largely been driven by the risk of inflation, falling conventional annuity rates and changing customer sentiment as people start living a longer and healthier life in retirement.
We see these factors as continuing to drive change, probably more so than the regulation changes which in reality will have less of an impact for mass market and mass affluent customers.
While it may be a popular ruling with the wealthy, for most of the UK population, annuitisation is a good thing. Continued innovation and new products entering this market is testament to this. Customers are telling us they want flexibility and income growth, but they also want lifetime income guarantees.
What do you see as being the pros and cons for people looking to choose an investment linked annuity over alternative products?
The investment linked annuity gives customers the potential to receive a greater income than through a fixed level conventional annuity, and this can also be tailored to an individual’s health conditions if appropriate.
Customers have the flexibility to change income levels at different stages of retirement and their income has the potential for growth which can in turn negate the impact of inflation. They also benefit from a minimum income guarantee and death benefits.
Another advantage of the investment linked annuity over, say, income drawdown is the power of ‘mortality cross subsidy’. Both the annuity and drawdown essentially have underlying investment funds that must perform at a certain level for the fund and income to stand still or grow.
Once you start applying the mortality cross subsidy or ‘lifetime bonus’ to the annuity, the investment fund underlying the drawdown product has to work that little bit harder just to keep up. For example, at age 77, the drawdown fund would need to work around 2% harder than the asset backed annuity fund.
The investment linked annuity does not come with a 100% income guarantee, and clearly there is investment risk for the customer. But a 100% guaranteed level income does not hedge against inflation (unless they choose an RPI annuity which gives them a much lower income at outset), and this is a risk that cannot be ignored.
There has been much expansion in the ‘third way’ space in recent years. However, given that the average pension pot stands at around £27,000, how applicable are these products for those on average incomes?
The flexibility and simplicity of our asset backed annuity, and the fact that the minimum investment is £10,000, means it is suitable for the majority of UK customers who are willing to accept an element of investment risk on some of their pension savings, while having a minimum income guarantee to rely on. For many customers, they may have more than one pension pot, or other assets they can rely on.
Low annual management charges and a simple range of investment funds to choose from make the product attractive to a previously poorly-served group of retirees.
Sun Life Financial of Canada are the latest provider to exit the variable annuity market. In your view, what are the future prospects of this market and what can be done to improve its future prospects?
The exit of Sun-Life of Canada is a real shame, mainly because it reduces choice, and for many customers it may have been the best option. The reasons why they exited the UK may have nothing to do with their product or the future of this market, and the general feeling is that we should all expect to see lots of innovation and growth in the next few years from other providers.
There is clearly a massive opportunity for providers and advisers if we can get it right. We are very excited about the future of this market, and committed to providing innovative, simple and good value products to meet the customer need.
Aston Goodey joined MGM Advantage in summer 2008 as sales and marketing director. He came from Prudential where he was business development director for retirement income products. An expert in this market, he has been integral in the development and subsequent successful distribution of the Flexible Income Annuity.
MGM Advantage is a provider of innovative retirement income solutions, sold solely through independent financial Advisers. Our Flexible Income Annuity and Enhanced Annuity aim to ensure customers receive the best possible income in retirement, whether they have a health impairment, or a changing lifestyle ahead and need a flexible income.
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