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Billy Burrows: Advisers should create their own fixed-term annuities

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Advisers could sidestep insurance companies and create their own fixed-term annuity product using a Sipp to secure better returns for clients, according to Better Retirement Group director Billy Burrows.

The fixed-term annuity market has continued to expand this year as providers look to offer consumers alternatives to conventional annuities.

LV=, MetLife, Just Retirement, Aviva and Primetime all offer fixed-term products through financial advisers.

Burrows (pictured) says by transferring a client’s money into a Sipp and investing in a fixed-term cash deposit account, advisers could offer a fixed-term annuity with the same income and a higher maturity value than would otherwise be available from an insurer.

Burrows’ analysis focuses on a 60-year-old man with £100,000 to invest. Assuming a commission payment of £1,500, a fixed-term income plan from Just Retirement pays £4,600 a year with a guaranteed maturity value of £83,241 at the end of the five-year term.

Burrows says by moving the client’s money into a Sipp account and investing in a five-year fixed term cash deposit account paying 3.9 per cent a year – a rate offered by Scottish Widows – an individual would be able to secure the same annual income with a guaranteed maturity value of £90,000.

Burrows assumes the overall Sipp set-up costs are £500 and the adviser is paid £2,000

He says: “This is a fantastic example of how an adviser can really prove their value to a client after the RDR.

“While packaged products from insurers may still be suitable for people with smaller funds, a DIY approach can deliver better outcomes for consumers with larger pension pots.”

Just Retirement external affairs and customer insight director Steve Lowe says: “One of the key benefits of our product is the break clause. If a customer becomes ill part way through their fixed-term, they can break the contract and purchase an enhanced annuity instead.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. David Trenner - Intelligent Pensions 2nd August 2012 at 2:38 pm

    Tom, I suspect that you have been a bit hard on Steve Lowe, as I imagine he said a bit more than that! However, I have reached the same conclusion as Billy, if you are in drawdown and get ill you do not need a break option to buy an impaired life annuity!

    Oddly enough being told you are about to die does not inspire many folk to go out and buy any sort of annuity!

    The LV= break options do look a little more attractive than those of other FTA providers, but they all have the weakness that they do not insure against falling annuity rates. Someone who bought a FTA 5 years ago (had they been available) would now need close to a 50% enhancement to break even with the annuity they might have bought at the outset.

  2. Good idea, however as I understand, with the LV and similar plans, the income is actually guaranteed for the duration. Using the 5 year example, if after year 3 GAD reduces significantly the client cannot physically take the same income…. therefore you dont actually have the certainty you do with most fixed terms plans. At least, that’s my understanding.

    @ David Trenner, allthough you dont need to become ill for a break option I think the point that the article was trying to highlight was that buying a 5 year deposit will come with hefty exit penalties, if access is allowed at all which could cause problems trying to annuitise a drawdown plan.

  3. It’s an excellent idea from Billy and a real alternative to a Fixed Term Annuity, which are of course being hit by falling gilt yields (as is max GAD).

    Charges need to be taken into account on the SIPP, although I have seen instances of these falling after a number of new product launches.

    Investing in SIPP deposit accounts isn’t straightforward either. (1.) Researching them has been traditionally hard, although there is now a solution for this, see below (2.) The best rates are often from institutions covered by alternatives to the FSCS, you therefore need to do a little more research into the various compensation schemes (3.) Not all SIPPs allow unrestricted access to deposit accounts (4.) There are of course issues with breaking the fixed rate products if indeed an Annuity is required.

    I do though think that this option is a real alternative to a FTA.

    For advisers wanting to consider this route we provide a best buy table for SIPP deposit accounts. It’s free to use, has over 120 rates on it and is available here: http://www.investmentsense.co.uk/free-services/best-buy-savings-accounts/accounts-for-pensions/

    I hope this helps advisers with their research.

    Of course if you are going to follow this route you need to be able to re

  4. Thanks for the helpful comments above.

    One point worth making is that you could set up a series of one, two, three and five year deposits adding additional flexibility

    The break clause is useful but how many clients have suddenly developed a life threatening illness?

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