The core idea is a good one. As retirement stretches into three decades, equities seem a better bet than gilts.
With this product, Prudential should be commended for creating something that can give even those with small pension pots a way to benefit from market growth and the flexibility to increase or decrease income levels to suit their circumstances.
Aimed at annuitants with £10,000 or more, it does bring a new option to the table. Prudential has identified the 24 per cent of annuity purchasers with funds of between £10,000 and £20,000 as a key market.
But I have a concern at who will buy this and whether they will fully understand it. It is OK if somebody has a small pot alongside other retirement income but if this is their only source of pension, then they cannot afford to risk a portion of it on the stockmarket. The guaranteed income at outset is almost 40 per cent lower than a conventional annuity and it should not be sold to people who cannot afford to lose that.
Persuading people with such small pots to invest in the stockmarket is a big step to take, particularly now. The insurer’s back-testing figures show that someone taking out the product in the middle of 2002 when markets were at similar levels would have boosted their income by almost 60 per cent by 2008. If the current malaise turns out to be a short-term blip, then taking out the product today will have been a good investment.
But that is a pretty big if for someone with no other source of income for life. With just about every economic pundit on the globe describing the current state of the world’s finances as the worst since the Great Depression of the 1930s, some would say that sounds like wishful thinking. I would expect many in the target market to take as much income as possible, requiring a smoothed return of 6 per cent which is clearly not a certainty right now.
An interesting question is where does it stand in the risk spectrum? Its guaranteed income from outset, at below 4 per cent for a 60-year-old male, is lower than some third-way products on the market. Paradoxically, because of the smoothing, the part of the income that is at risk is not exposed to the stockmarket to anywhere near the degree of third-way products. Prudential says this means it is not riskier.
This is a slick-looking contract and Prudential will doubtless sell a lot of it. Commission options go up to 3 per cent initial and 0.5 per cent trail but you have to wonder what advisers will be doing for that trail. With income drawdown, there is clearly something to be done at reviews but the only thing the adviser can do here is change the income. Of course, adviser remuneration has to come from somewhere and maximum commission will in some circumstances take more than 10 per cent off the client’s income for life.
I am not against this launch and there will be many situations where it will deliver successful growth to annuitants for many years to come, as some existing Prudential with-profits annuitants have already seen. It will also be beneficial for those in drawdown approaching age 75 who do not want to go into alternatively secured pension but advisers need to be absolutely sure their clients fully understand the downside.
John Greenwood is editor of Corporate Adviser