It's a fact: we're living longer.

According to the Office for National Statistics life expectancy for those aged 65 in 2009 was projected to be 21.1 years for males and 23.8 years for females.

With the prospect and optimism of longer life, comes difficult decisions about how we maintain our quality of living; invest savings we have accumulated throughout our working life and about how we choose to spend them.

For many people, considering the options available when retiring can be a difficult and nerve-racking decision. It is for this reason that the majority of us turn to our advisers to point us in the right direction and to guide us through these difficult choices. Sadly, many people, who do not take advice relating to retirement income, simply take the annuity being offered without shopping around.

Retirement advice – the statistics

Figures published by the ABI show that 79.1% of individual pension business in 2009 was written by IFAs; 16.6% was sold through limited range/single tie and only 4.2% of sales were non-intermediated. So far so good. A clear landslide for advised sales.

The sale of retirement income products throughout the same period shows a different side to the story, with one in four cases (26%) being non-intermediated.

Furthermore, in 2008 the ABI published it's 'Pensions Annuities' research paper. The paper highlighted that 83% of annuity contracts purchased from a provider – other than the consumer's personal pension provider – were arranged through an IFA and 13% were arranged by an adviser tied to a single provider. These figures may suggest that many retirees are not properly considering the Open Market Option (OMO) and that many are in-fact exercising some form of brand loyalty to their personal pension providers. Providers are of course required to promote the availability and importance of the OMO, but it would seem that annuitants aren't quite grasping the reality of how they could benefit from moving their funds away to another provider.

Recently the Advertising Standards Authority (ASA) banned a TV advert by Aviva which claimed that they could provide up to 20% higher retirement income for its customers. Irrespective of the validity of this particular promotion, these types of headlines will at least make people think about the prospect of getting more money in retirement. Some have voiced concerns over retirees not exploring all of the options available. According to Missoldannuity.co.uk, over 40,000 people reach retirement age each month and pour more than £1bn into lifetime annuities. In many of these cases, the consumer may have little, if any, understanding of the alternative options available to them. Unfortunately the world of pension arrangements is complex, and often it is this fear that will drive people down the path of least resistance.

As with all areas of financial services where alternative products exist, consumers will look to their advisers to consider the options in order to find a suitable solution. These options may include exercising the OMO, purchasing a conventional annuity or income drawdown product.

But are there alternatives?

Third way products: the best of both worlds?

Following their popularity in the US, third way products have been introduced to the UK retirement market over recent years. There are now a number of products available from an array of providers to offer different options to those at retirement.

Some see these products as a means of bridging the gap between traditional annuities and income drawdown plans; providing an element of secured income, combined with the flexibility and potential for growth of an unsecured pension.

As these propositions are still relatively new to the UK, there is not yet a defined classification of what they include. However, products on offer currently go by different names, including variable annuities, guaranteed retirement options and third way or 'middle market' products.

A flexible approach

There are a number of factors which will need to be carefully considered before a decision is made as to whether these plans are suitable for each client, including attitude to risk and the requirement for income and capital guarantees.

Although features vary from provider to provider, one of the common advantages of these products is enabling the client to remain invested whilst benefiting from these guarantees.

They can offer the ability to defer the purchase of a lifetime annuity, which can be seen as a big advantage, particularly when annuity rates are low, thus negating the risk of being 'locked in' for life.

With a fixed term annuity for example, retirees whose health may have deteriorated would be able to benefit from enhanced rates available upon maturity.

Additionally, those whose health has been maintained will benefit from having further options available at the end of the term (i.e. reinvestment into another third way product, move to drawdown or purchasing a traditional lifetime annuity).

As capital (Guaranteed Maturity Values) and income guarantees can be included, this approach can offer consumers certainty and flexibility.

It is, however, these guarantees that come at a price and it is important to understand that these products may not be suitable for all clients as additional guarantee charges can erode capital.

Synaptic Research – Guaranteed Retirement Options

In December 2010, Capita Financial Software launched a new Guaranteed Retirement Options area of the Synaptic Research suite. The development was in response to feedback from advisers and providers alike who felt that it was difficult to compare these unique offerings due to their hybrid nature.

Advisers can enter client details and specification to narrow down selection before producing a suitability report of their findings to justify their selection and evidence compliance. Specific product details such as payment options, whether transfers are accepted and if products can be converted to lifetime annuities are available for comparison amongst the products listed.

Commenting on the development, Steve Lowe, Marketing Director at Living Time said:

"We are delighted to be involved with Capita Financial Software's recent development. This is a real opportunity for advisers to consider alternative retirement products
which better suit their clients' needs and offer more options to help improve financial outcomes for retirees".

The Guaranteed Retirement Options area currently includes 9 'third way' type plans from 6 providers including Living Time, AXA, MetLife and LV=. MGM Advantage plans are due to be added in January 2011.

Sean Casey
Marketing
Capita Financial Software