Product providers need to think outside the box to deliver more appropriate retirement income vehicles
Offering and assuring an attractive, meaningful income that is sustainable for life is a challenge facing many product providers and intermediaries, especially in an era where the client’s life expectancy is longer due to health improvement interventions.
This situation requires product providers to develop innovative and sustainable retirement products that match a client’s unique needs. At the same time, it demands the financial advice community to make the correct determinations to offer a suitable vehicle that can secure their client a comfortable future.
The common retirement income vehicles in the market include Fixed Annuities and Living Annuities, both of which have their advantages and disadvantages.
Living Annuities have come to outpace Fixed Annuities to draw the majority of new business. For various reasons, many advisers convince their clients to go with Living Annuities – which are the most popular because they provide flexibility and potentially high returns provided the market returns are good. Any remaining capital is also transferred to beneficiaries on the death of the annuitant. The downside of the option is that the client is exposed to market falls. This requires that there be good investment decisions made in order to preserve the capital as best as possible. To achieve that, the portfolio would have to be managed by someone with competent experience and the ability to manage investment risk well.
“Fixed Annuities, by contrast, are used to guarantee income for as long as a client is alive ensuring that there is no risk of outliving the income or exposure to market dynamics – good or bad. However, the amount guaranteed depends on rates at the time of taking out the annuity and there is a risk that the client locks into a poor rate,” says Craig Sher, Head of Product Development at Discovery Invest. Fixed annuities also lack flexibility to adapt the income amount each year in line with clients’ changing needs. In addition, the client’s capital is forfeited in full if he dies early. Some fixed annuities, however, provide options for the client’s beneficiary, a spouse for example, to receive their income after death. However, this option has the impact of lowering the fixed income that the retiree will receive each year.
Common as they maybe, the two product types have proven to have challenges that prevent them from optimally addressing today’s retirement needs.
To provide the best product and advice, a focus has been put on developing an innovative annuity vehicle that can deliver the best of linked and fixed annuities without the downsides. “This new breed of annuities that is developing aims to capture the best of both worlds. It allows clients to guarantee a minimum income level as long as they live, while still providing flexibility of income choice each year and any remaining funds are transferred to beneficiaries upon death. Discovery’s unique product, the Guaranteed Escalator annuity, is designed to meet this need. This product provides a guaranteed minimum income level that ratchets up each year when markets rise, ensuring that no matter how long a client lives, he will never outlive his savings” says Sher.
