Type: With-profits annuity
Minimum premium: Lump sum £10,000
Minimum age: 50, 55 from April 6, 2010
Income frequency: Monthly, quarterly, half yearly or yearly payment options in arrears or advance
Options: Secure level option providing a minimum income, minimum payment guarantee of up to 10 years, joint life
Commission: Initial up to 3.5% or £500, renewal up to 0.5%
Tel: 0808 234 5100
Prudential has introduced a with-profits annuity that allows annuitants to choose a level of income within a set range and change it every two years.
Annuity Direct director Stuart Bayliss says Prudential has been the market leader for with-profits annuities since the demise of Equitable Life. He points out that the company is still selling the more flexible – and in some ways more complicated – flexible lifetime annuity.
Looking at the new product, Bayliss says it is the first of a new generation of investment-linked lifetime annuities. “It has a single investment link to the Prudential’s with-profits fund with the objective of producing a smoothed 8 per cent return,” he says.
According to Bayliss, this product is a with-profits annuity without the stigma of with-profits. He adds that improvements have been made that will hopefully aid customer understanding. “The selection of assumed bonus rates has been replaced by the choice of an income, but you would get away from the fact that the level of income equates to the level of risk that you are taking because you are assuming an underlying average growth. If that growth is not met, your income will fall.”
Bayliss points out that annual review statements will help adviser and client communication. “Adviser remuneration is on factory gate basis and includes the option of renewal commission.”
He says that other improvements are greater simplicity over the guarantees “In the old with-profits annuity these were very valuable but well hidden and hardly ever mentioned by advisers or Prudential.
“The flexibility of income is also clearer in the new product. It has all the benefits of a lifetime annuity – guarantee periods, payment periods and joint life benefits. This is attractive to people who want a level of ongoing investment risk rather than purchasing a conventional guaranteed annuity. The guarantee is separate and can be shown to increase with good performance,” he says.
Bayliss thinks the literature is very comprehensive and IFAs will need to select what best suits their customer base and processes.
Discussing the potential drawbacks of the product, Bayliss says: “Detail in the quotations does not emphasise enough the level of increased risk that the client is taking when choosing higher income. In some ways, ironically for some clients, the fact that it is a lifetime annuity rather than operating under the unsecured pension rules is in itself a disadvantage.”
The final little niggle for Bayliss is that Prudential has brought ring fenced benefits into the income choice annuity from its flexible lifetime annuity. “This concept has not been adopted by any other pension income provider and tends to throw up another small detail which requires explanation. Overall there is little to dislike about this product. It could expand the market for investment-linked annuities, “ he says.
Norwich Union, Legal & General and Liverpool Victoria are other providers of with-profits annuities that Bayliss regards as potential competitors. “ It is likely that these companies, plus others, will enter the new generation smoothed investment vehicle annuity marketplace over the coming months.
“The variable annuities written under unsecured pension rules will continue to offer competition because of their greater flexibility, but these products are finding it difficult to provide the financial guarantees at a competitive price,” says Bayliss.
He concludes: “This is a good product and shows the other with-profits annuity providers a way forward.
Suitability to market: Good
Adviser remuneration: Good