Falling rates will drive demand for non conventional annuities say IFAs

The vast majority of independent financial advisors in the UK expect an increase in alternative forms of annuities because of falling rates.

Some 90% of IFAs expect to see more alternatives, according to new research from retirement income specialist MGM Advantage.

In contrast, just 5% of IFAs think rising annuity rates will create more demand for conventional annuities.

The research, conducted amongst 115 of the UK's leading IFA annuity specialists, also shows how an increase in third way or alternative products is seen as the most likely outcome following the removal of Compulsory Annuitisation at Age 75.

Analysis of the latest MGM Advantage Annuity Index, which tracks the income paid on enhanced and conventional annuities on a quarterly basis, shows that since launching in June 2009, the Index has fallen six out of seven times it has been updated. Specifically in the three months between March 2011 and June 2011, the average conventional and enhanced rates fell by 0.18% and 3.50% respectively.

‘We think the downward trend for annuity rates is likely to continue and given this, conventional annuities are going to become increasingly unsuitable. People need to make sure their pension pot works as hard as possible for them and the best way of doing this is to look to annuities paying an enhanced rate,’ said Aston Goodey, sales and marketing director at MGM Advantage.

The research also shows that the majority of IFAs, 59%, think that allowing clients to remain in drawdown beyond Age 75 introduces them to increased risk.
 
‘We fear for those people who will now drift along in drawdown as they are no longer obliged to purchase an annuity at Age 75. Not only are there long term risks associated with inflation but the investment returns that compensate for the absence of mortality cross subsidy become increasingly unrealistic,’ added Goodey.

He explained that mortality cross subsidy is the process of pooling the funds of annuity policyholders who have died earlier than expected and sharing these among remaining customers. You don't get mortality cross subsidy with income drawdown. At MGM Advantage the mortality cross subsidy is awarded in the form of a Lifetime Bonus.