To annuitise or not to annuitise? The question dogs many weighing up their retirement options. Given the current state of the global economy – when even the experts are nonplussed as to which small European nation will buckle next – the safety of an annuity has begun to seem incredibly attractive.
Those suffering from sleepless nights over how to decumulate their pots are currently helped by the government through legislation that requires everyone to annuitise by the age of 75. However, the campaign to remove this obligation has been stepped up in the past few weeks, with the Conservatives turning it into a political football. Should the requirement be removed and retirees given access to more options, it will be up to specialist annuities to win over customers looking for a more custom-made product.
One of the most recent entrants to the specialist market is the variable annuity. But despite all the talk over the past couple of years, they are still to make their long-predicted impact in the UK. Last month’s survey of income drawdown providers found naysayers in abundance.
Comments such as “so far, the products offered have been too costly and complex, with guarantees that are flawed around the edges”, and “these products carry very high charges that potentially undermine the additional value that can be derived from an active investment approach,” were not uncommon. This should not be a surprise, because if third way products do ever catch on, they could be a serious threat to the income drawdown market.
But so far, variable annuities have not got anywhere near the same kind of prestige or renown in the UK as they enjoy in Japan or the US – where they are the decumulation product of choice for 80% of retirees. Over here, they still suffer from the reputation of being expensive and complicated. The second of these two accusations is perhaps more down to the fact that each product is unique, with different guarantees and different charging structures.
Confusion also stems from semantics. The term ‘third way’ is often used as an all-encompassing term for various types of annuities that don’t fit in anywhere else. This includes US-type variable annuities, and what links them is their commitment to bridging the gap between an annuity and income drawdown.
Another challenge variable annuity providers face is their low profile in the UK industry. Despite MetLife and The Hartford being little known over here, on the other side of the Atlantic they are Fortune 100 companies, with MetLife the largest insurer in the US. May saw Aegon Scottish Equitable become the first provider with a long standing in the UK to enter the variable annuity market, and many were tipped to follow.
LV, Norwich Union, Prudential, Scottish Widows and Hargreaves Lansdown have all confirmed they are considering dipping their toes in, and Axa has confirmed it is looking to enter the market next year.
But where a lot of the variable annuity providers had sold the security of their products on the stability of their counterparty insurers, the economic chickens, it seems, have now come home to roost. AIG Life UK guaranteed many of the products, and last month’s announcement by its parent company that it is up for sale will surely cause apprehension among investors.
Kelly Wheble, an IFA with Positive Solutions, says: “With third way annuities, the bottom line is they’re trying to get you to increase the risk profile of a client saying they’ve got the guarantees. But the guarantees are only as good as the credit risk on the other side. Lehman Brothers could have been guaranteeing the other side of the equation, which is now worthless.
“Then where are you? You’ve put someone who is risk averse in this product because you’ve got guarantees and the guarantees are worthless. That could be a nasty situation.”
He adds: “I think it’ll be a real uphill struggle for those companies to market their products. If I were them, I would seriously consider if I wanted to invest in the UK market at the moment.”
Nigel Callaghan, pensions analyst at Hargreaves Lansdown, reveals the company is still weighing up third way products, but the collapse of such goliath insurance institutions has made them take stock. The derivatives that lie behind the guarantees will shoot up in price because of the implied future market volatility, and it will either be the provider or the consumer that will have to pay the price. With variable annuities already seen as expensive, it may seriously dent their attraction.
“These companies I’m sure are perfectly fine, but will consumers be convinced?” asks Callaghan. “There were not many customers before, and the added cost will not make them any more attractive. There’s a lot of tumbleweed at the moment; Standard Life said it would launch a product in late summer, but I have heard nothing since. The silence is becoming a bit deafening.”
