Huge growth forecast for the retirement income market in the coming years will present opportunities no financial adviser seeking long-term success can afford to ignore.
The increasing number of people reaching retirement and the shift from final salary to money purchase pensions are creating a dynamic market set for sustained growth for many years. Clear evidence of this is reflected in figures showing annuity sales rose 21.5% in 2006 to £9.6bn and income drawdown sales grew 73% to £2.6bn. The Association of British Insurers forecast the annuities market would further double to more than £18bn in five years time - this three-year old prediction is already looking conservative.
More and more people are reaching retirement in desperate need of good, unbiased advice to help them find the right products to make the most of their pension pots. Moves by the Government to increase the numbers of those exercising their open market option should add to this demand for advice.
However, many retirees will be looking forward to more than 20 years in retirement and could do well to maintain some flexibility to react to their changing circumstances during retirement. They will not want to be funnelled by default into the straightjacket of a lifetime annuity but are likely to be keen to avoid the costs and risks of income drawdown.
The launch of 'third way' products such as fixed-term annuities offers a golden opportunity for financial advisers to address the needs and concerns of retirees at a time when the impact of a poor decision can be irreversible and expensive. Most advisers are already well aware that current lifetime annuity rates are much lower for those in the early years of retirement and only really begin to increase at ages 70 upwards. With low-cost, fixed-term annuities offering better income rates, better death benefits and more flexibility, there is huge scope for advisers to carry on providing retirement income advice and planning to a much broader spectrum of retirees right up until the age of 75. Lifetime annuity rates have fallen due to current economic conditions and the high demand for long-term fixed-interest assets. This has pushed down the income yields available, making the shorter-term investments which support fixed-term annuities more attractive as they produce a higher income.
No-one should be surprised if the 'third way' quickly becomes the mainstream solution. It might also unlock some of the £4bn-plus that is simply rolled over into annuities with existing pension providers. The advantages of fixed-term annuities could make them the logical choice for tens of thousands of people retiring each year, all of them requiring ongoing advice over their retirement needs. Advisers who recognise the trend and position themselves to benefit are in for some wonderful years to come.
Peter Quinton is business development director at Living Time.
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