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Flexibility factor

Baby boomers are reaching pension age in their masses and they are bringing with them an idealised view of retirement. They could be in retirement for at least 30 years and their income needs over that time will undoubtedly change but are hard to predict.

In most consumer markets, the products are ahead of the customer need. In other words, you do not often realise you need something until it is put in front of you. It feels to me like the annuity market has started to lag behind and it is leaving advisers in no-man’s land.

The problem is that the annuity market is polarised. The conventional annuity is inflexible and does not always take account of the fact that people are living longer and are more active in retirement.

At the other end of the scale, the so-called third-way ann-uity can be expensive and complex and is not really designed to meet the needs of the mass market. Adding to that is the fact the market seems to have hit rocky ground with the Hartford’s exit and the withdrawal of Aegon’s Five for Life product.

Arguably, these products are more of a flexible drawdown product and the fact they have been branded third-way annuities has meant that advisers are confused about their true identity.

The name third-way annuity implies a middle ground or a better way but they are not proving to be a valid altern-ative for the majority of our retiring population – partic-ularly those with pension funds of less than £50,000.

This polarisation is leaving us with no doubt that an alternative to the conventional annuity is essential for our retiring population.

The truth is that the real third-way annuity market is what we call the flexible annuity market. The flexible annuity is not a new concept but has been largely over-looked by providers and advisers alike. This space is currently occupied by with-profits and unit-linked annuities and there is scope to refine and deliver new products that are absolutely geared to meeting the retirement income needs of the mass market.

The flexible annuity is a natural stepping stone from the conventional and impaired annuity. It is a comfortable step for the customer and adviser, offering a secure income for life but also giving the customer the opportunity to grow their income over the life of their retirement or indeed change it according to their needs.

From an income perspective, a flexible annuity should deliver more for the customer in the longer term than income drawdown as the customer benefits from mortality cross-subsidy and income guarantees.

The flexible annuity market is the new dawn for annuities. It is not a question of if this will become the retirement income norm, merely a question of when.

Aston Goodey is sales and marketing director at MGM Advantage

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