The role of guarantees in wake of ‘toxic’ annuities

Guaranteed drawdown may be the answer amid scepticism over annuities.

Pensions-savings-retirement-piggy bank

Unit-linked guarantees could play a bigger role in the post-pension freedoms world,  given annuities have fallen out of favour, according to The Lang Cat.

Speaking at the Money Marketing Retirement Summit in St Albans, The Lang Cat principal Mark Polson said over a 25-year retirement, guarantees do not outperform income drawdown as a retirement investment vehicle and nor do they offer the certainty of annuities.

But he said after carrying out research to analyse the guarantees market, he was surprised to find the products do actually deliver the returns they are supposed to.

Polson said: “I hated guaranteed products for being expensive and over-engineered to the delight of actuaries and the despair of real people. I still think they are expensive and over-engineered, but when we started modelling and looked at what these products did, there were some interesting findings.”

He argued unit-linked guarantees could be a viable product for those individuals where drawdown might be inappropriate and at a time when there is such a negative perception about traditional annuities.

He added: “Where unit-linked guarantees could have a role is psychologically for clients. If we accept that annuities are considered to be on a par with toxic waste, but where straight-up drawdown is either too expensive to have an adviser manage on a saver’s behalf or too volatile, I could see a place here for unit-linked guarantees for the first time.”

In October The Lang Cat argued advisers are wrongly discounting guarantees as part of the retirement planning process.

The FCA has previously been urged to investigate whether unit-linked guarantees provide value for money, with Aviva head of financial research John Lawson branding some products as “almost criminal”.

Also at the summit, Retirement Intelligence director Billy Burrows argued recommendations are often based on a blend of annuities, guaranteed products and accessing a pot under pension freedoms.

He said: “There is a strong case for annuities, guarantees and flexibility. The million dollar question is what combination is right for an individual. That’s the skill that advisers bring.”

Burrows added the complexity around retirement and how long to stay invested means the industry urgently needs to resolve the issue of delivering advice to those with smaller pots.

He said: “The bottom line is retirement planning now is too difficult for the man on the street. There is this huge advice gap, and just because someone has only got a modest pension pot, they shouldn’t be treated as a second class citizen. We must find a way of giving these people the advice they need.”

In a separate session on taking income in retirement, EY senior adviser Malcolm Kerr said the traditional wisdom that suggests savers can take 4 per cent out of their pension each year without outliving their money may no longer hold true.

He said: “The rule is there is no rule. Every individual is different and needs to be educated and understand they will not get 6 per cent per annum every year. What’s needed is an honest, albeit difficult, conversation with your client.”

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  1. “If we accept that annuities are considered to be on a par with toxic waste,”
    A product that provides an absolute guarantee of income is considered toxic, perhaps Mark Polson would like to explain why. Don’t think I have come across anyone who has died as a result of having an annuity….

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