The fixed-term annuity market has seen real innovation lately with several new providers entering the market. Helen Morrissey takes a look at these new products and asks what role fixed-term annuities can play in a retirement planning strategy.
Fixed term annuities have been around since Living Time entered the market five years ago.
While other providers considered the market, we had to wait until 2010 before LV= became the second entrant.
However, in recent months we have seen something of a rush with Just Retirement and Aviva coming to the market in May and June respectively.
It has also been reported that MetLife are looking to launch a fixed-term annuity product in early 2012.
So, why are we seeing such a flurry of market activity now and who is likely to use these products in the future?
One reason for this product development could be that after five years, increased understanding means advisers finally feel comfortable in recommending fixed-term annuities to their clients.
According to LV= head of annuities Matt Trott, advisers and their clients are really starting to get to grips with the fixed-term annuity concept and that changing retirement patterns necessitate the need for a more flexible approach.
“The market is progressing extremely well,” he says. “I feel that advisers have embraced the flexibility that a fixed-term annuity can give them.
Social changes in the UK means that the standard level annuity isn’t the only option for people any more they are looking for more flexible products and we are finding there is a lot of interest in these products as a result.”
However, despite the increased flexibility these types of product can bring, there are still signs that clients are wary about utilising these products as part of their retirement planning.
“We are not using these products at the moment we are aware of them and have recommended them on a number of occasions but we have yet to see any take up,” says Lowes Financial Management’s senior technician Barry O’Sullivan.
“They are a useful product for some people, particularly with the death benefits they offer, but we feel the uncertainty of fluctuating annuity rates and how much their pot will buy them at the end of the term makes them quite unattractive for the mass market.”
The Better Retirement Group annuity director Billy Burrows agrees, saying decreasing annuity rates mean clients need to be very aware of the potential risk that they may not be able to purchase the same level of income at the end of the fixed-term as they could have had if they had gone into a standard level annuity.
“On the one hand, I clearly welcome new product development and anything that offers more choice for individuals but I do worry advisers and their customers may not understand the risks they are taking on,” he says.
“If a client had £100,000 they could purchase an annuity of approximately £6,000 per year.
With a fixed-term annuity they would get this amount for say, five years, and then probably have around £80,000 with which to purchase an alternative product at the end of the term.
The risk is that you won’t get the same level of income that you have previously been getting.”
Do the new products deal with this issue?
The most recent entrants to the market have developed products able to mitigate this issue to some extent. Just Retirement’s product enables the annuitant to automatically shift to an enhanced product should the need arise.
“In many ways this product is a game changer,” says Just Retirement’s external affairs and customer insight director Steve Lowe.
“A healthy person could take out this annuity, and should they develop a condition which qualifies them for an enhanced annuity then they can move straight into it provided they have purchased plan protection. This means the annuitant can benefit from the substantial uplift that comes with getting an enhanced annuity.”
The minimum fund value to enter this product is £10,000 with a maximum amount of £1m. Lowe believes the product can be used by a wide variety of clients.
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined