When is an annuity not an annuity? The answer is when it is a fixed-term annuity.
The fixed-term income policies issued by Aviva, Just Retirement, LV= and MetLife are, of course, pension drawdown policies which pay a guaranteed income for a pre-determined term, at which point a guaranteed maturity value is paid. This must be used to invest in another drawdown arrangement or a lifetime annuity.
My views on these products are well known – I fear that investors do not understand the risk that when these polices mature they will not be able to buy a lifetime annuity that will pay the same income as they were getting from the fixed-term policy.
As an aside, I came across some press articles from 1994 where we talked about falling annuity rates and it occurred to me that much of the same story is relevant 17 years later as annuity rates continue to fall.
However, I am sure my friend Kim Lerche-Thomsen, the inventor of fixed-term annuities, will fall off his chair when I announce that I have done a U-turn and am now actively promoting these policies.
’I have don’e a U-turn and am now actively promoting fixed-term annuities’
Three things have happened to change my mind.
First, in a move towards evidence-based advice, I have done my own research and can demonstrate that a 10-year fixed-term policy appears to give the customer a good deal. Second, I have been persuaded that there are good reasons to believe that annuity rates might improve in the future. Third, I have come to the opinion that it may not be the end of the world if annuity rates do continue falling because there will probably be other income products in 10 years time and investors can always carry on in drawdown.
To be clear, my position is that guaranteed lifetime annuities are probably the most suitable option for most investors but for those who want flexibility and think they might benefit from higher annuity rates in the future, perhaps through enhanced annuities, then fixed term may be a sensible option.
Billy Burrows Director The Retirement Partnership