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Fixed deals can open up annuity choice

After third-way annuities, the next new wave of products to launch into the decumulation market look set to be the fixed-term or temporary annuity.

Money Marketing broke the news recently that LV= is looking to offer a fixed-term annuity, which has prompted a largely positive response from advisers.

At present, Living Time is the main provider in this market with an income plan offering a guaranteed income for a minimum of three years up to age 75 and a guaranteed capital value at maturity which is determined at the outset.

But Living Time has suffered from AIG’s collapse because its underwriter Alico is a subsidiary of AIG and some advisers are wary of placing business despite Living Time reassuring investors their money is ringfenced in a separate vehicle away from AIG.

Canada Life is another player in this sector, although its annuity growth account, which has a fixed term of five years, does not offer a guaranteed maturity value. It has the advantage of running up to age 85 but it comes with some risk as there is an element of investment exposure.

LV= is believed to be looking at launching a similar product to the Living Time income plan and is also understood to be considering a fixed-term annuity that gives customers investment options.

LV= head of annuities Matt Trott says: “We are looking at the area in the market between an annuity and an income-drawdown contract. We are still in the planning and feasibility stage but it is looking promising.”

Hargreaves Lansdown head of pensions research Tom McPhail says he backs LV= moving into this area as he believes this market has considerable potential.

He says: “The Living Time product has been around for a few years now and has made some inroads into the market but we think a wider choice will encourage this area of the market to grow.”

Hargreaves Lansdown no longer uses Living Time’s product due to the fact it is underwritten by the AIG subsidiary but McPhail says he thinks very highly of the product. He says its strength is it is a very simple product with the only risk being what annuity rates will do during the term of the product. If the LV= product is to be a success, he believes it too will have to be simple.

He says: “We have been surprised that we have not seen more players coming into this sector already. I do not know why. I guess there is a limited budget for product development and they are concentrating on bespoke underwriting and enhanced annuities, which perhaps has obscured any potential for development in this area.”

But Burrows & Cummins director Billy Burrows says he would not expect to see a rush of other insurers following LV= into this area although he does expect some of the mainstream insurers to take a closer look at investment-linked annuities.

He says: “The point is that clearly there is a demand and a need for an alternative to lifetime annuities and I think fixed-term annuities have a place but it is important that investors and advisers understand the risks involved.

“The disadvantage is that, at the end of the fixed-term period, there is no guarantee they will be able to buy a lifetime annuity at the same or at a better annuity rate than they would have done before they started the fixed-term annuity.”

He says there are advantages to these products, particularly that if people’s circumstances change, they have the flexibility to buy a different type of product in the future, such as an enhanced annuity if their health deteriorates.

Burrows does not think investors should put all their money into a fixed-term annuity and suggests it should make up part of a portfolio if a client chooses to take this route.

He thinks with-profits annuities may offer a better option for some investors who want to see their income grow.

He says: “One of the dilemmas is that if you are investing your money for a period of time, you will be expecting some growth. Some of the alternatives, such as with-profits annuities do provide income growth potential.”

Standard Life head of pensions policy John Lawson says insurers are faced with two choices at present – whether to change their model to an asset manager or to stay as an insurer and focus on launching this type of innovative product.

He says: “There is potential for a whole spectrum of stuff in between drawdown and annuities. Any new product needs to fit with customer needs. They need to engage with IFAs and find a real unique selling point. They have got to find a compelling story to sell it to the customer and IFAs. There is no compelling story there yet.”

Lawson thinks if the bigger firms were to enter this sector, it would open up the market.

He says “When Aegon came into the variable annuity market, it really got the market going. Getting the big guys in and getting them talking about it to their distributors would really open up the fixed-term annuity market.”

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