Variable annuities have been a hot topic in the at-retirement space for the past few years and the debate surrounding them looks set to continue. The withdrawal of The Hartford and the replacement of Aegon's 5 for Life product has forced the industry to sit back and take stock of where these products are heading.
For a long time the at-retirement market has been polarised. Retirees had the choice of annuitisation which offers a guaranteed income but little in the way of flexibility. At the other end of the scale, clients could choose to go into income drawdown which gives them the chance of continuing to make investment gains but with no protection against market falls. There is undoubtedly a need for a middle option and variable annuities seem to fit the bill. Variable annuities have been extremely successful in the US and it was hoped that this would be replicated over here.
However, advisers have been wary about these products and some believe them to be over priced and complicated. Many advisers have admitted that they don't understand the products and this has made it impossible to recommend them to clients. Even the fact that variable annuity providers tend to be big US players rather than UK-based has proved a real challenge for those who have questioned these providers' commitment to the UK market.
So what effect has the withdrawal of The Hartford and the replacement of 5 for Life had on the market? Are these products effectively finished? Far from it. I've spoken to many people on this subject in recent weeks and the response has invariably been that these products do have a place in the market. A recent Watson Wyatt survey would appear to back this view by showing a healthy increase in sales over the first quarter of 2009. It would seem advisers are getting to grips with these products and they are seeing the value in them. Of course changes will need to be made and any new providers entering the market will need to ensure their product model is robust enough to weather volatile investment conditions. Indeed many of the providers I spoke to have said they would consider entering the market once the economic climate has become more stable. Of course more providers means more competition and it is to be hoped prices would come down as a result.
It is heartening to see that despite some early reservations, advisers and providers are starting to embrace these products. As a result clients will continue to have more options to choose from when they come to retirement.
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