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Independent study looks at when fixed-term annuities could benefit clients

LV= has commissioned an independent study of the fixed-term annuity market, which finds the products’ flexibility means they can be a good option for retirees.

In May, Legal & General revealed it warned the FSA it has “deep concerns” about the potential for misselling of fixed-term annuity products.

In an interview with Money Marketing, L&G group executive director for protection and annuities John Pollock said fixed-term annuities are “not good product for consumers”.

He said: “They place quite a large bet on markets and longevity in a manner that is uncertain. They may get an uplift for a period, and I stress the word ’may’, but I do not think the fact they are betting the rest of their life against uncertain conditions is appropriate.”

Last month, MetLife pulled out of the fixed-term annuity market. The provider said the decision was made in response to historically low interest rates, which it says have prevented it from pricing the product competitively.

Aviva, Just Retirement, LV= and Primetime Retirement say they remain committed to the fixed-term annuity market.

LV= commisioned actuarial consultancy Milliman to conduct an analysis of fixed-term annuities to establish when the products could be suitable for retirees.

The report looks at the impact the development or deterioration of a series of illnesses has on the likelihood an individual would receive a higher pension income by delaying the purchase of a lifetime annuity.

It also illustrates and compares a number of possible outcomes for someone who buys a joint life fixed-term annuity followed by a single-life annuity versus an individual who buys a joint life annuity at the outset.

For example, Milliman found if there is an age gap of zero, three or five years between a couple and a 100 per cent spouses pension is provided as part of the policy, there is a “high likelihood” that buying a joint life fixed-term annuity followed by a single life annuity will deliver a better outcome than buying a joint life annuity.

The report concludes: “Given the increased likelihood of retirement lasting 20-30 years, it may be inappropriate to commit financially so far in advance to a specific shape and level of income when much could change over this period.

“All things being equal, it is likely that the overall aggregate income will be lower if the client buys a fixed-term annuity, followed by a lifetime annuity, compared with a lifetime annuity at outset.

“However, all things are unlikely to be equal. So the use of these products in circumstances where the flexibility they provide has value should still be considered.”

LV= managing director of retirement solutions John Perks says: “The report establishes that there is a role for fixed-term annuities in planning for retirement in the right circumstances.

“However, as in many things in life, there are no cast iron guarantees that these products will deliver a better outcome and the opportunity to make financial decisions during retirement as circumstances change should not be underestimated as an end in itself.

“Where the potential exists for the product to provide a higher overall income, clients would be well advised to consider these products.”

Better Retirement Group director Billy Burrows says: “This is the most substantial piece of research on fixed-term annuities we have seen to date and it makes some powerful arguments for recommending them.

“The elephant in the room is the sales process. At the moment fixed-term annuities are marketed as simple products but in reality they are quite complex.”

Milliman analysed the impact on a 65-year-old’s retirement income of buying a conventional annuity at the outset versus buying a five year fixed-term annuity followed by an enhanced annuity. It found the 65-year-old would need to receive an uplift in retirement income of at least 19 per cent for the fixed-term strategy to deliver better results than buying a conventional annuity. Typical uplift figures quoted are from LV= research.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I have not yet read this report and look forward to doing so. I can see that there is many advantages for a fixed term annuity, but there is also some big factors against them (that are not particularly well promoted at present).

    Firstly, many FTA’s provide a lower level of starting income than a conventional annuity. This is at a time when a retiree is usually needing maximum income and may have already failed to save enough (judging by some of the fund sizes I have seen).

    Secondly a lot of negative things have to happen to get the advantage against securing the benefits of a conventional annuity. The annuitant’s circumstances have to deteriorate (divorce, widowed?) as well as their health. Granted these things may happen, but they are still negatives.

    The largest issue for me is the uncertainty of what the fund may buy at the end of the fixed term. How much will the fund be? (usually lower than at the start), what will have happened to investment conditions?, what will have happened to annuity rates? Will they be able to secure an income the same or better than that provided at the start (compared to a conventional annuity from start?). This uncertainty = risk. Risk has to be a key discussion element of any advice process and may mean, in my opinion, that FTA’s are suitable for only a limited amount of people.

    Having said all of that, I wouldn’t want FTA’s to vanish as innovation in alternatives to a conventional annuity have been slow in arriving.

  2. The main argument I hear against FTAs are that annuity rates are under increasing pressure from the Bank of England’s QE programme. However, the amount of money that will come flooding into the market due to auto enrolment, much of it seeking a safe haven in bonds, is likely to give the BoE an opportunity to unwind its programme and allow rates to rise. FTAs could be an ideal way to have a guaranteed income while awaiting annuity rate recovery which seems almost inevitable at this stage.

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