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Capital guarantees are too expensive and too safe

Simon Smallcome

Chancellor George Osborne’s Budget announcement in 2014 held the promise of a new world of retirement solutions, giving providers the opportunity to innovate as never before. The tragedy is that providers have not risen to the challenge laid at their door – largely repackaging and renaming what came before.

There is a clear need for innovation and the importance of balancing risk with return in order to provide for customer needs. It’s about the importance of mitigating risks – the risk of retiring at the wrong time, the risk of losing money etc. It’s about finding a middle ground – between risk and reward, by offering a minimum.

An area that is ripe for innovation is the realm of capital guarantees – which simply won’t have a place in future retirement planning if they continue to be expensive, long-term and low in equity content.

Indeed the capital guarantees which have been available on the market over the last two years don’t offer the end consumer the flexibility and protection that is wanted and needed going forward.

Financial markets are currently experiencing some of their greatest volatility in recent years. It is a chilling thought when considering the total values of savers’ pensions and investments which are currently exposed to these risks.

We are no longer in a time when it is suitable for millions of savers to be sleep-walking through the investment and retirement journey whilst being exposed to the markets. Looking to the US we already see a vast market for guarantees, it’s now time to make the same case here.

Current guaranteed products are expensive, low-equity offerings which simply aren’t fit for purpose. It’s time for providers to start creating a new future for the guarantee. People do not want unadulterated, direct exposure to the markets – they want to protect and safeguard a proportion of their long-term savings from the horrors of stock market volatility.

Next-generation guarantees need to give something back to the pension saver, locking in growth in the markets. The principle that if you give something up, you should get something in return applies more than ever. The saver must profit if the markets continue to rise, in the knowledge that their pot will never go down again, and that the full locked-in amount will go to their loved ones if they die before the guarantee term.

Guarantees need to abandon their rigidity and disdain for customer needs. They need to become more flexible, delivering results over shorter terms, and fit with the changing circumstances people have in their lives. Someone who is 60 and knows they will retire at 65 can ensure part of their pension is protected from market volatility, but also have enough equity invested to generate the returns they want when planning for retirement.

Innovation can take the fear out of staying invested before and during retirement. The challenge to the industry is to reinvent guarantees and make them compelling to savers once again.

Simon Smallcombe is UK managing director at Axa Life Invest



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‘Almost criminal’: FCA urged to investigate unit-linked guarantees

Industry experts have branded unit-linked guarantees “almost criminal” and called on the FCA to investigate whether the products represent value for money. Unit-linked products, commonly known as guaranteed drawdown, have been touted by providers since the 2014 Budget as a way to offer both guaranteed income and flexibility. But Aviva head of pensions policy John […]


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

  1. Problem is we can not know when someone WILL retire.

    After 55 it can be at any time.

    One option I’d to have money in different funds to reduce the risk.

    However the return on cash is so low.

  2. All that needs to be said about capital-guaranteed third-way investments can be found in Matthew 25:14-30.

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