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Variations on a theme

“The overall retirement income market is going to grow significantly, not least because there are more defined-contribution schemes as people reach maturity,” says Burrows.

He predicts this growth will be across the range of products, with standard and enhanced annuity business continuing to increase at a fast rate and with-profits annuities growing steadily.

“I would also expect to see more and more people choosing the drawdown option as greater numbers take tax-free cash and no income,” he adds.

This growth is coming at a time where there has been a marked improvement in annuity rates.

Burrows says: “Annuity rates are being driven up by bond yields and competition. The mighty Pru has finally woken up to the fact that it needs to be competitive in the nonwith-profits market, meaning there is now competition at the top. This is good news for investors.”

Burrows is not as critical of the low take-up rate of the open market option as many other industry figures.

He says: “I would be surprised if those with significant amounts of 50,000 or more in their pension funds were not aware of the open market option, either themselves or through their adviser.

“But there is a problem for those with small funds. For such people, it may not be absolutely necessary to exercise the open market option and the extra cost of advice may outweigh any gains.

The companies that are offering the best annuities are, by and large, those selling the most personal pensions. If you have got a pension with Prudential and you retire taking the group’s annuity, you probably will not be recognised as taking the open market option but you may end up in just as good a position as if you had sought advice.

“Standard Life is an interesting case, in that if you retire with SL you may not get the best annuity but you will not be far behind.”

Burrows welcomes third-way annuities and says it is good news that Standard Life and Aegon will enter this market later in the year.

“If you ask middle Britain what it wants, it is not going to say annuities but while the idea of drawdown is appealing, it is pretty complex, expensive and risky.

“Here is the best of both worlds, an annuity-type income with drawdown flexibility and with some of the risk taken out. I think there is a strong customer proposition and it is great that product development is still evolving.”

Many advisers have said the cost of variable annuities is too high but Burrows believes this is overdone.

He says: “If you compare an annuity with the cost of a variable annuity, then, yes, variable annuities look expensive but if you look at the additional costs between a normal drawdown and a variable annuity, at around an extra 75 basis points, the difference is not that huge.

“For a lot of investors, an extra three-quarters of 1 per cent on the cost of their fund for the guarantee that comes with a variable annuity represents good value for money.”

Burrows suggests that one reason that these products look like poor value is the label they have been given. By calling them variable annuities, they invite comparison with traditional annuity products rather than with drawdown.

“It is important to get the costs into perspective. One of my concerns is that by wrapping it up as a variable annuity, people forget this is drawdown with a form of guarantee. The terminology is misleading.”

The rapid growth of the market and products means that an adviser’s job is becoming more difficult.

Burrows says: “It is all well and good bringing out these products but the issue for most people is getting the right advice.

“With more and more products available, this is one area of personal finance where people need sophisticated advice. The fact that there are not many advisers properly experienced to advise in this sector is the problem.”


Growing trend goes with the grain

From time to time, I am afforded the opportunity to share my views on what is happening in world markets with a wider audience through radio or TV. Last week provided just such an opportunity when news was thin on the ground and a wider trawling of the stories circulating on investment topics was necessary. The news that the Indian government was considering banning futures trading in agricultural commodities caught my eye and led to deeper research in the following days.

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The latest update from the Sustainable Investments Team at Royal London Asset Management, Responsibility Matters, is now available. In this edition the team look at issues such as the growing acceptance of sustainable investing and technology in China. Read the update here: The value of investments and the income from them is not guaranteed and […]


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