What next for variable annuities?
The past four years or so have seen the arrival from the US of a new kind of pension product, offering people a more flexible retirement income, plus the assurance of a guarantee protecting their capital or income levels.
But does the decision by American insurer Hartford Life early in May to pull out of the UK market spell the end for this new breed of so-called third-way or variable annuities?
Third-way annuities are billed as a halfway house between the security of ordinary annuities that pay a set income for the rest of your life, and the flexibility and growth potential of income drawdown, where your pension pot remains invested in the markets.
They sound like a useful solution for the phased retirement that many of us face. But the past year’s turbulent conditions have proved too much for the Hartford at least.
“Variable annuities have suffered from bad timing,” says Nigel Callaghan, pensions analyst at broker Hargreaves Lansdown. “They face a falling investment market, spiralling contract guarantee costs, overly complex product terms and a sceptical public.”
Martyn Laverick, marketing director of IFA AWD Chase de Vere, agrees that timing has been a problem. But, he says, popularity was not an issue.
“The Hartford had started to make good headway in the UK and Europe; it ended up partly a victim of its own success, because offering the guarantees on contracts became more costly than it could ever have imagined," he explains. ”With serious problems in the US market as well, it had little choice but to retrench and focus on its home market."
Hartford’s 18,000 UK policyholders will continue to be looked after by its Dublin-based service operation. AWD Chase de Vere is reassuring clients that their pension pots are safe and existing guarantees will be honoured.
But what lies ahead for the wider third-way market, which consists of offerings from Lincoln, MetLife and Aegon?
Callaghan believes the market is not dead: “The other companies are expected to continue promoting variable annuities in the UK, although trading conditions are likely to remain unfavourable for the rest of 2009.”
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.