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Guaranteed growth

With an ageing population, the retirement mar- ket is one of the few sectors where all indicators look positive for growth.

Datamonitor shows over the last five years, the annuity market has recorded healthy growth of 12 per cent a year while income drawdown has seen 14.9 per cent growth.

The accelerating market has brought product innovations as advisers and consumers look for new ways to mitigate retirement risks. The growth of unit-linked guarantee products – or variable annuities – continues to be strong, with sales doubling in 2008 to £1.1bn from £539m in 2007, according to Watson Wyatt.

The case for guarantees might seem easy to make when markets are plunging. Guarantees come at a price, and increased market volatility has meant providers need to price to reflect this but it is important to note that combined fund management and guarantee charges start from just 90 basis points.

In predicting how these products may be suitable for the future, the past can be a useful reference point.

MetLife’s Retirement Portfolio enables clients to plan their retirement with more certainty. It benefits clients in two ways – with regular lock-in of fund gains every three years and an additional 3 per cent income enhancement for every year income is deferred.

As an example, a client investing £100,000 in 2003 would have known they could take an immediate lifetime guaranteed income of £3,800 a year. If the client chose to defer for six years, the income guarantee would have been enhanced by 18 per cent or an increased lifetime income guarantee of £5,197 a year. In addition, if invested in the cautious managed fund, they would get an additional boost to the fund locked in after three years, meaning their income guarantee was enhanced to £6,197 a year.

As we enter a new market environment, it is equally important to focus on prospects for traditional retirement products.

Annuity rates are heading down from recent highs and are expected to continue to fall due in part to quantitative easing. Income from an annuity is already down by around 10 per cent since July last year.

Income drawdown is also suffering as stockmarket volatility continues. Many clients who invested in these products in the run-up to the market crash are seeing fund falls of up to 50 per cent as the combined impact of volatility and taking an income from the fund becomes clear.

Some argue a guarantee is not necessary as we have already had a market correction but over a 15 to 20-year retirement period, a guarantee provides reassurance from inevitable peaks and troughs which will be seen in that time.
Unit-linked guarantees will increasingly feature as a strong alternative for millions of people retiring in the coming years.

Dominic Grinstead is strategic development and marketing director, MetLife Europe

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