Investment products that give certainty of income as well as flexibility should be the winners from the new pension freedoms, a report on unit-linked guarantees says.
The report, carried out jointly by Retirement Intelligence director Billy Burrows and Unbiased.co.uk and sponsored by Axa, says unit-linked guarantees can help advisers and clients with the major “dilemma” introduced by the Budget reforms of managing income needs and investment risk.
Despite the products being available for a decade, growth in the market has been slow. However, surveys and sales figures are pointing to a growing demand for products that blend the certainty of annuities and the flexibilities of drawdown.
Aegon, MetLife and Axa are the only providers currently offering unit-linked guarantee products in the UK.
Burrows says: “We have this risk dilemma. People either take too little or too much risk. If drawdown becomes the new default, you’ll have a lot of risk-averse people taking risk.
“Part of the answer is products like unit-linked guarantees.”
Burrows says advisers’ main concern is the cost of guaranteed products.
Zen Financial Service managing director Mike Pendergast says: “They sound good for the more cautious client, who likes the idea of an annuity and doesn’t like where annuity rates are but is too cautious to go the full way to drawdown. But it depends on what the costs are.”
Axa Life Invest UK managing director Simon Smallcombe says while drawdown costs may be higher, the contracts are more transparent than annuity pricing.
He says: “There is a very transparent cost to the adviser and consumer. It costs us to provide that guarantee and that will be passed on to the consumer.
“When you buy an annuity you see an income but you see none of the costs of buying that annuity. It’s completely opaque. You don’t see any margin, you don’t see an explicit charging. Consumers aren’t aware of that, but in drawdown it is completely transparent.”
He adds that costs can be controlled by applying guarantees to only a portion of funds and that the market will soon be worth at least £3bn a year.
A separate report from influential think-tank the Pensions Policy Institute, published last week, revealed savers are keen to use third-way products such as unit-linked guarantees. However, it warned inertia and a lack of understanding could lead to poor outcomes.
The qualitative study of defined contribution savers between 55 and 70 found a host of obstacles standing in the way of them achieving good retirement outcomes.
These include an unwillingness to plan beyond the next few years, poor understanding of how to make assets last, a reliance on provider defaults, and the idea they could find “better” investments outside of pensions.
The study said once key concepts were explained to consumers – such as the benefits of illiquid assets and longevity insurance – they were open to making decisions that would lead to better retirement outcomes.
Andrew Day, principal director, Depledge Strategic Wealth Management
Guarantees definitely have a place in the market. If you’ve got a pot up to £100,000 and you can’t afford to lose it they can be very useful. They will inevitably grow in popularity as a result of the Budget.
You’ve got to remember there’s an investment underlying it. Of course, timing the market wrong in drawdown they can look very sick in five or six years’ time. This is where financial advice is so crucial, in dealing with risk and longevity.
The issue is there aren’t enough advisers and there will be some major problems further down the line because providers like to flog products and there’s bound to be a problem if advice is taken out the picture.