Are consumers getting a raw deal from fixed term annuities?

This article is completely wrong!

The key client market for Fixed Term annuities is those clients who are healthy now, or possibly only slightly unhealthy, but may very well not be later on, and could therefore benefit from the uplift in income from an impaired / enhanced annuity.

They are mainly an alternative to ordinary guaranteed annuities for those clients who are too risk averse for drawdown, and / or do not have a pension pot of sufficient size to make drawdown cost effective.

The ability to defer the final decision on death benefits for perhaps 10 or 15 years is also a valuable benefit, and this alone could result in a better annuity on a single life basis for many clients.

I find Andrew Tully's arguments slightly strange - as I have been looking at MGM's offering recently and a lot of their marketing material for their investment-linked annuity extols its virtues and benefits over drawdown. I would also have thought that as a major provider of impaired / enhanced annuities it would be in favour of more widespread use of temporary annuities by advisers - as when the temporary annuity expires it might stand a chance of picking up the fund if the client and / or spouse have developed medical issues during the term. If the client had gone into an ordinary guaranteed annuity at outset though, this would be lost to MGM for ever!

To the best of my knowledge, Canada Life, with their Annuity Growth Account, pioneered the idea of a Fixed Term Annuity with the balance of the fund remaining invested. I always preferred this to Income DrawDown because it keeps the investment and income parts of the equation entirely separate.

Imagine the scenario at an Income DrawDown periodic review. The fund's performed very well and is at a high point. The level of income for the coming three years is re-set accordingly. 6 months later, the fund suffers a severe downturn in value but the level of income being drawn from it remains referenced to its high point at the last review date. The impact on the fund can be not only devastating but irrecoverable. Apart from the difficulty of meeting the Critical Yield requirement for maximum income (which, I think, is what most people want ~ not everybody, but most ordinary people), that, to my mind, is the biggest risk posed by Income DrawDown. We've only ever done a couple and both turned out badly. But we've also done three Annuity Growth Accounts, two of which have now run their course and vested fully, and both did exactly what was hoped for from outset, better in fact. All I had to do along the way was monitor the investment portfolio, which is a lot less complicated than periodic Income DrawDown reviews. In both cases, the annuitant's health deteriorated over the first five years and we eventually arranged advantageously enhanced lifetime annuities for which they wouldn't have qualified at outset.

And, notwithstanding the effects of Solvency II and increasing longevity, how many of us believe that in five years time interest rates and gilt yields are still going to be at their current historic lows? And, apart from that, I still nurture the faint hope that the government may eventually be persuaded to remove the shackle of annuity rates on accumulated retirement funds.

But those are just my own experience and opinion ~ please feel free to express different ones of your own.

Kevin

You do not say who you work for (and google does not help me!), but i wonder if you have an axe to grind? I have done some extensive research on FTAs and to say "This article is completely wrong!" suggests that you may not know very much!

The basic concept of FTA as a 'wait till I get ill' policy has certainly been improved by the Just version. LT & LV= (and I believe Aviva) have the big disadvantage that when you get ill you still have to wait until the end of the fixed term. However the internal rates of return are usually less than you can get in a good cash fund (not Standard Life Stirling!) and from what I can see you will get about 10% less income on the 5 year version, so its a big gamble for someone with a small fund: what happens if you do not get ill?

David

Leaving aside the merits of individual plans I think the answer [as is often the case] is it depends! One can make any set of assumptions and projections but if they are not borne out then the outcome may not be as hoped for.

Therein lies the risk of LTA's but then again what if a perfectly fit guy fully annuitises and drops dead a day after his guarantee period ends - that's not great value either.

Ultimately the client must decide which factors and features are most important to them at that time and then the planner can advise accordingly.

Regretably I lost my crystal ball about 35 years ago but often wish I could remember where I left it. Wouldn't half be handy in these strange times!

David

the axe I have to grind is one against an article that seeks to compare what is an alternative to a traditional annuity for lower risk clients with lower value funds against the supposed advantages of a high risk product for those clients with higher value pension pots, and argues that the latter is a better option!

I have used FTAs for a number of clients - none of whom would have been allowed anywhere near a drawdown product by any sane adviser or competent compliance officer due to their attitude to risk, fund size, and lack of other assets or sources of income.

I have also used invested annuities for clients whose attitude to risk and other factors warrant them, and drawdown for clients who are suitable for it.

I have also done some research on FTAs, and it is not just about a "wait until I get ill" approach. For example I have used them in one instance to obtain a higher income over the time period to State Pension Age than could be obtained by a conventional annuity. This means the client will probably see income drop at the maturity point, but this will be more than compensated for by the State Pension and the higher income now means he can enjoy it now. I have also used an FTA to generate a lower income (but higher death benefits) for a client to keep taxable income below the age allowance limit.

I also agree with some of the points Julian makes (especially on Drawdown reviews that are now moving to 3 years) and have also used the Canada Life AGA in the past to good effect.

As Duncan has said "it depends". I'm looking at an FTA within an Income Drawdown scheme (LV= offers this) for a client who already has 20k+ per annum income, and thus is able to exhaust this "extra" pension fund.

The annuity is fixed, and the return over the term easily calculable. According to the Time Value of Money (TVM) function on my fancy financial calculator - if I'm doing it right - the AGR to the client on the residual fund after each payment is around 2.25% per annum. Not exciting, but safe, and is satisfactory in the circumstances where the main aim is to exhaust the pension fund into his private bank account, over a period to avoid paying 40% income tax on any withdrawal.

It's horses for courses, and FTAs have a place in every retirement planning IFA's toolbox - but that doesn't mean it should be pulled out on every job.