September 2007

Look at the options

Dear Editor,

The at-retirement market is becoming an increasingly significant business opportunity for financial advisers. Falling annuity rates, combined with the increasing popularity of income drawdown products, are having a dramatic effect on the reputation of annuities.

Research that we carried out recently with 1,000 consumers shows that the popularity of annuities has almost halved over the past six years. Whereas in 2001, more than half of people (57%) said they thought having to buy an annuity with their pension fund was acceptable this has now fallen to less than a third (30%).

These figures demonstrate that the concept of forced annuitisation is clearly unacceptable to a significant group of people, so advisers have a crucial role to play here in opening up other options for their clients. For many people, the freedom of being able to keep their pension fund invested and maintain greater control is an attractive choice.

However, the knowledge gap in this area is still substantial. Almost a third of people (30%) said that they did not know whether or not they find annuities acceptable, providing a significant need and opportunity for advisers to assist clients making financial decisions as they approach retirement.

As well as explaining the options available, it is also vital for advisers to help clients understand the risks involved. The decision to purchase an annuity carries risks because there are many different options available and once the decision has been made, there is no going back.

The ability to keep control over investment strategy and manage the level of risk can make income drawdown the preferred choice for many clients. It also provides the option to phase retirement as clients can use some or all of their fund to purchase an annuity at any time.

These benefits are having a positive impact on the amount of income drawdown business being written. Based on our own book of business the popularity of income drawdown has increased dramatically since A-Day. New sales as measured by premium volume have increased 259% in the twelve months from April 2006 compared with the previous year.

Income drawdown is not necessarily going to be appropriate for everyone. However, it is important to evaluate it as an option so clients don't unnecessarily miss out. Decisions made at retirement can have a dramatic effect on the financial security of a client in later years so the need for advice here is paramount.

Nick Bladen
Head of Pensions Marketing
Skandia