Pre-retirees looking to avoid buying conventional annuities – which are paying near-record low levels of income – now have more options, thanks to new “third-way” plans.
More pension providers are offering “third-way” plans, which are hybrids of conventional annuities – providing a guaranteed income for life – and income drawdown schemes, which keep pension savings exposed to the stock market.
The appeal of third-way plans is that they can be bought for fixed terms, rather than for life, as is the case with a conventional annuity.
This flexibility gives “breathing space” to pre-retirees who may be reluctant to make the irreversible decision to buy a conventional annuity. Rates of income paid by conventional annuities fell nearly 8 per cent last year, and are not showing signs of recovering in the near future.
Liverpool Victoria (LV) this week launched its Protected Retirement Plan (PRP) which offers guaranteed income for terms of 5 to 25 years, as long as the plan ends before the age of 75. Significantly, a guarantee is also offered on the maturity value of the plan.
When the plan matures, investors can choose to buy a lifetime annuity, or use the remaining pension funds to transfer to unsecured pension – or invest in another PRP.
“A lifetime annuity is not the ideal option for people who don’t want to be locked into a product for the rest of their life, as personal circumstances may change, and they could miss out on any beneficial future legislation or new products,” explains Matt Trott, head of annuities at LV.
“Giving people the ability to reassess their retirement income needs after set periods means that they can benefit from products that suit their individual requirements at a particular time,” he adds.
Living Time, Met Life and Canada Life offer similar fixed-term plans, which also offer death benefits and “value protection” options.
But advisers say the arrival of a household name may spur other providers to consider moving into the market. “LV is a very strong brand,” says Laura Goodman, of Rockingham Retirement, the independent retirement income specialists. “Choice in the wider market is key to securing a better standard of living.”
While the LV product offers the comfort of guarantees on income and maturity values, other retirement plans may appeal to investors wanting some investment flexibility.
MGM Advantage, the mutual society, is about to launch an “asset-backed” plan which is classed as an annuity but has many drawdown features.
Customers can set their own income level, which is reviewable every five years and subject to minimum and maximum limits.
Pension savings can be invested in the stock market but, unlike full drawdown facilities, investment choice is limited to seven funds offered by MGM.
“We are taking an annuity and making it more like drawdown,” says Aston Goodey, sales and marketing director at MGM Advantage. “We are genuinely trying to give people more options in retirement.”
Advisors say MGM’s plan is aimed at those who don’t want to take on the risk or complexity of a full drawdown contract but want more than a conventional annuity.
“These are really a more transparent version of with-profits annuities,” explains Billy Burrows of Burrows and Cummins, the annuity advisors. “The difference is the MGM plan offers more investment choice and control than with-profits plans.”
Meanwhile, research released this week showed that most married retirees are failing to maximise their pension income by not choosing a joint-life annuity.
Joint-life annuities are valuable to married couples as they ensure the income can continue to be paid to a surviving partner, rather than being lost to the insurance company, as is the case with single life plans.
But Aviva’s Real Retirement Report found that only a third of married couples under 65 are taking out joint-life annuities.
