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Annuity alarm

Stockmarket-linked annuities add further risk to retirement

Savers must be scared out of their wits to want to ever buy a financial product again.

The latest retail conduct risk outlook published by the FSA warns against almost every product you can buy, from complex investment plans to everyday packaged accounts sold by high-street banks.

It is perhaps a little ironic that these warnings comes as the FSA prepares to pack up and file out of its Canary Wharf HQ. After all, many of those products it is warning about have been developed during its tenure.

But it is a pretty damning review of the financial industry and few areas escape. IFAs, tied salesmen, bankers, wealth managers and even mortgage brokers have all been found by the FSA to be ignoring guidelines in some way or another.

One of the trends that can be taken from the retail conduct risk outlook is that products under scrutiny are those that are fashionable, they offer what the customer thinks he wants, rather than what he should want.

Take Sipps, for example. They used to be deemed niche products for the super-rich only.

Yet sales have risen fivefold in recent years and few talk any more about having a minimum amount of £100,000 before you go anywhere near these flexible pension plans.

But as greater numbers of workers retire with defined contribution and personal pension plans rather than a final-salary pension, the need for a more flexible approach to generating income will become paramount.

Downward pressure on annuity rates is not going to ease any day soon, if ever. First, we have increasing longevity and second, we have the intervention of the EU and its proposed Solvency II regulation. (All eyes will be on this week’s key vote on amendments).

If the proposed rules go ahead, there is one school of thought that suggests insurers might decide it is not financially worth offering annuities, particularly the fixed-rate variety, and withdraw from the market.

Whichever way you look at it, it would seem as though financial advisers are going to have to be on the ball if their clients are to eke out as much money as they can when they retire.

Many pension experts reckon that consumers are going to have to be more flexible and look to annuities that are invested in the stockmarket, for example. But will that improve the situation? Projection charts show that an investment-linked annuity based on annual returns of 5 per cent fares no better than an RPI-linked annuity over the long term.

Then there is income drawdown.

The FSA warns that there is a potential for consumers to suffer detriment by taking out drawdown rather than an annuity.

It might be on to something as it is easy to see why people may be tempted to sidestep annuities.

Show someone an illustration comparing the returns from a standard flat-rate annuity and an income stream based on returns of 7 per cent a year and you will see the pounds signs lighting up in people’s eyes.

Little wonder the alarm bells are sounding. Investing in riskier investments during retirement is a worrying concept. It is a worry for people whose nerves will have been severely tested during all those years they saved for a pension.

Now they might have to endure further stockmarket volatility in retirement, not knowing whether their income is going to rise or fall.

It is also a concern for financial advisers. Retirement planning is moving in a new direction, in some ways, it is moving to another level and all the while, the advice they give is going to be under increasing scrutiny.

Paul Farrow is personal finance editor at The Telegraph Media Group

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