Counting the annuity pie

IFAs claim the government’s decision not to remove the tax barriers that are thwarting innovation on ‘third way’ annuities has kept pensioners stuck between a rock and a hard place.

In his first Pre-Budget Report (PBR), chancellor Alistair Darling toed the line by upholding the government’s view that annuities are the best solution for the majority of people.

Ahead of the PBR, the financial services industry called for full flexibility for providers developing these variable annuity products, which sit somewhere between an annuity and income drawdown.

IFAs (Independent Financial Advisers) argue the advent of third way annuities would increase choice for people reaching retirement.

Annuities offer safety but relatively poor returns, while income drawdown allows full flexibility over income but is a risky strategy in the current market environment.

“The Pre-Budget Report did not help at all the necessary research, design and product innovation that’s being cried out for,” says Nigel Callaghan, pensions analyst at Hargreaves Lansdown.

“We’re only a couple of years away from the introduction of personal accounts which is going to increase the number of people that will at some point be facing the decision of what to do with their pension pot. The two options at the moment are in some ways keeping people stuck between a rock and a hard place.”

Third way annuities have gained massive traction in the US, in part due to tax breaks not currently available in the UK, and are said to account for 80% of the retirement market.

Lincoln, MetLife and the Hartford Group are among the providers to have transported products across the Atlantic, with more firms rumoured to be imminently joining the fray.

Andrew Tully, marketing technical manager at Standard Life, says the government’s decision will not necessarily stop providers from introducing these products to the UK market, but will not allow them the flexibility they could get in other countries.

“We will keep pushing for changes to go ahead so that we can offer them as flexibly as we’d like to,” he says.

“It’s very much a mass market product in America and we believe it could be a mass market product here too.”

Despite the set-back, IFAs agree third way annuities still have a place in future UK retirement provision, although cost is an issue.

Like any new product, third way contracts are expensive and when making use of the guarantees there remains a limit on the income pensioners can withdraw.

“I’m not sure [the PBR] has killed third way annuities but it has not done their sales prospects any good,” says Nigel Barlow, head of retirement income solutions at Just Retirement.

“They would appeal to cautious investors with fairly large funds and you may see more of those as DB schemes wind up.”

Callaghan adds: “A combination of the high price and the fact that it’s early days in terms of product innovation means the IFA market as a whole is waiting for things to develop and for the products to become a little leaner and meaner.”

1 December 2007