Products currently on the market have met with wariness from advisers, perceived by many as being expensive, complicated and difficult to compare.
William Burrows Annuities director Billy Burrows says advisers should be looking for products which offer a guaranteed income for life, giving all the advantages of drawdown without a lot of the risk. He says: “What is the resistance to these products? It comes from the cost. The million dollar question is whether advisers and clients think the extra charge is worth the extra benefits. Some of the costs I have seen are a fair price to pay for the benefits.”
Burrows says he is most likely to recommend Hartford Life’s variable annuity but Lincoln’s product is also worth looking at.
However, MetLife’s trustee investment plan is not emerging as a popular choice with advisers, which may explain why the life office recently cut its charges by 0.45 per cent.
Hargreaves Lansdown pensions analyst Nigel Callaghan says: “The charges on the retirement plan are pretty eye-watering at the moment. I do not know of any brokers selling it.”
Annuity Direct director Stuart Bayliss says it is a confused contract that tries to do too many things but ends up not doing any of them well. He calls it a work in progress.
Bayliss says he is in the process of selling a couple of Hartford Life variable annuities but he is surprised by the lack of interest from many clients. He says: “I think people are relatively conservative in their attitudes at the moment. In the long term, these products have a future but they are not the panacea that people think they are.”
He believes that advisers will currently struggle to justify using a variable annuity compared with a with-profits or unit-linked annuity because investment gains are looking good, with Libor rates and bond yields being favourable.
A recent survey by Watson Wyatt found that 70 per cent of advisers rated variable annuities more favourably than conventional annuities for generating income in retirement. Sixty per cent compared variable annuities favourably with income drawdown but the majority of advisers considered them a niche product.
Watson Wyatt says it found a low level of knowledge of variable annuities among advisers. Of the 50 IFAs interviewed, two out of five said they had little or no knowledge of variable annuities. Insurance and financial services practice strategy group head Colette Dunn says: “This is a small sample of IFAs but it clearly indicates that providers have some way to go before variable annuities are understood and accepted as a mainstream product by the adviser community.
“A good proportion of advisers like the variable annuity concept and can see the value for clients but they still need persuading about whether the benefits outweigh the costs.”
Richard Jacobs Trustee and Pension Services director Richard Jacobs says confidence and interest in third-way products will be boosted by Standard Life and Aegon coming into the arena.
Jacobs says: “I am hopeful about their entry as we need more of these products in the market. I have millions of pounds waiting to go into one of those contracts when the product guarantees are right and charges are lower.”
Jacobs says he has recommended the Hartford Life product a couple of times but has not yet completed a contract. He says: “The Hartford contract says it will protect capital and guarantee income and there is no doubt that it would appear to be the answer to everyone’s dreams. If you just take the normal commission, then the contract is very good. The big ‘but’ is who is giving the guarantee? I want some back-testing or confirmation that the guarantee will hold.”
Aegon’s product, Income for Life, will be a pensionable version of its 5 for Life plan. A spokesman says: “It will work in a similar way to income drawdown but with an appropriate fund range that will allow us to provide guarantees on income. There will also be different levels of income guarantees available depending on a customer’s age at outset.”
Standard Life’s variable annuity, to be launched this summer, will take the form of a set of guarantees that clients can add to the funds within their Sipp and will be available to new and existing Sipp customers.
Charges depend on which type of fund the client takes out the guarantee on but will be between 2.5 and 3 per cent, including commission, for the first six years and around 60 basis points less thereafter.
Prudential, Legal & General and Axa are also understood to be looking closely at launching similar products.
Legal & General wealth policy director Adrian Boulding says: “A lot of providers are trying to work out the best way to launch into this marketplace. These are potentially great products for customers but are often complicated and very different. Hopefully, the market will reach a degree of standardisation in time.”
Burrows says: “With a household name like Standard Life coming in, it really gives a boost to this market. The more players in the market, the bigger the market becomes. Variable annuities have a lot to offer the customer.”