View more on these topics

Choice of vehicle, Matt Trott, Head of Annuities, LV=


In recent weeks, we have learned that inflation has fallen to 4%. Although many readers would view this as high, it was sufficient to give reassurance to the markets that the Bank of England would be able to resist interest rate increases in the immediate future.

This has been considered good news considering the subdued growth of the UK economy which could suffer further if interest rates rose. On the other side of the pond, Standard and Poors has warned the US that their credit rating could be cut if their growing budget deficit is not reduced.

All these pieces of news have driven investors into the UK bond markets, reducing the yields available to both private and institutional investors. As the majority of annuity providers invest funds in the corporate markets, this has reduced the amount of income it can pass on the customers and has resulted in falling annuity rates.

So is now is a good time for customers to purchase an annuity? In reality, there are so many factors impacting on the annuity market that basing the decision purely on getting the best rate is a dangerous game.

Solvency II is likely to increase the cost of annuities in the future,though the impact may not be as great as originally feared, particularly for those composite insurers who can hedge the longevity risk against their term business.

Similarly, the full impact of Test Achats is yet to be seen, but it’s likely to result in marginally lower rates for males, but much better rates for females.

Then there are economic and investment conditions. Let’s face it, if you know where interest rates or bond yields are likely to be in 12 months
time, then you have the potential to get very rich.

So I’d suggest that the annuity purchase decision should be driven by individual customer profiling – when does the customer need to receive a fi xed income for the rest of their life, what is their risk appetite and are their needs and circumstances likely to change in the future?

It is important to assess both the benefits and risks of deferral if that’s the plan. Then consider that a customer deferring annuity purchase until they qualify for an enhanced rate could well increase their income in retirement by around 20% – a strong argument for deferral if the customer can accept the risk of doing so.

Then thoughts turn to the deferral vehicle. Some customers will not have the appetite for the full flexibility or complexity offered by Drawdown, so the ’breathing space’ provided by a fixed term annuity style product could be the perfect solution for someone looking to retire but defer locking into a lifetime annuity.

These products give customers the benefit of a secure income for a fi xed term, but with the full flexibility to purchase an annuity, transfer to
Drawdown or purchase another fixed term annuity at the end of the term. The beauty of the fi xed term annuity is that customers do not have to decide on the shape of their eventual annuity purchase until they come to buy it. This means adjusting their client’s income shape and level to suit them.

If a customer requires income higher than the GAD maximum, then LV= offers a Flexible Drawdown option which allows customer unrestricted
income, provided it is sustainable over the term of the plan, allowing advisers to develop an integrated income and investment strategy.

We are seeing a lot of innovation in the fi xed term annuity market at the moment, and we are expecting a number of new entrants into the
market over the coming months. Advisers need to be comfortable ensuring that they recommend the best annuity deferral vehicle for their clients, and this is defi nitely a part of the market that they need to keep abreast of.

Matt Trott is Head of Annuities at LV=



PosSol reveals more details of network model

Positive Solutions says it expects up to 70 partners to become part of its new network model. Money Marketing revealed in January that PosSol was to restructure its pricing model in order to operate as a network and a national. The new model will only be available to firms with over £150,000 in turnover and […]


N&P feels fury of Keydata investors at AGM

Angry Keydata investors descended on Peterborough last night to vent their frustration at Norwich & Peterborough Building Society’s board over the way it handled the Keydata crisis. N&P held its annual general meeting last night in the wake of being fined £1.4m by the FSA and announcing £51m in compensation for customers who were mis-sold […]

Limited cover

After identifying the keypeople in a limited company, how do you put insurance in place?


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm