View more on these topics

Guarantees in the retirement income market

Lorna Blyth, Royal London 

Do guarantees benefit customers and, if so, when? To answer this conundrum we commissioned Millimans, a global actuarial consulting firm, to conduct an independent review of the UK retirement income market and whether guarantees really do offer customers better value for money.

The brief

The study was one of the most comprehensive undertaken and covered a wide range of products currently being sold in the UK market.

The purpose was to analyse how well these met the income requirements for three example customers, each with a different perspective and spending pattern, under a variety of economic and market conditions.

The basics

It won’t surprise you to hear that there was no single product that met each of our example customer’s requirements.

The products with the highest level of guarantee place the most significant restrictions on the financial freedoms of a customer.

As customer circumstances change over time this could restrict the ability to meet financial needs so retaining flexibility to respond to these changes is important.

The bill

The higher charges and more conservative investment strategy used in guaranteed products can significantly reduce the amount of money customers get back. The study found that a product with only a modest guarantee returns around 30% less over the average retiree’s lifetime than a similar product with no guarantees.

Guarantees are of most benefit in adverse market conditions but the extent of that higher income during these periods can be a lot smaller than many perceive and investment performance has to deteriorate considerably and stay that way for some time for the guarantees to actually provide more income than a product without a guarantee.

And in terms of money back to the customer across their retirement the study found that a drawdown approach with no guarantees delivered 25% more than a drawdown with a guarantee.

The balancing act

Guarantees are essentially a trade-off between financial freedom and investment growth versus security and the point at which the trade-off becomes worthwhile, if it does at all, will depend on the customer and the product.

The bottom line

The issue is of course that while drawdown can deliver better value for money than a guarantee it also brings with it the risk of running out of money too soon. The good news is that there are now tools and investment strategies available in this space which can help you to explain how likely this is for your client and ensure that they don’t run out of money in retirement.

If you want to find out more please speak to your usual sales consultant.


Auto enrolment – so far so good?

Jamie Clark – Business Development Manager The recent report from the Pensions Policy Institute demonstrates the sheer scale of auto-enrolment so far and what we can expect in the future. We’ve pulled out the key information to save you reading the full report. Auto enrolment in numbers Sources: Pensions Policy Institute, The Future Book: Unravelling […]


Pension over-taxing

800,000 people are at risk of being over-taxed on their pensions, writes Steve Webb, director of policy at Royal London Hundreds of thousands of people receiving company and personal pensions should check their tax code to make sure that they are not being over-taxed, according to a leading pensions firm. Mutual insurer Royal London has […]


News and expert analysis straight to your inbox

Sign up

Why register with Mortgage Strategy?

Mortgage Strategy continues to be the market-leading B2B mortgage publication in the UK, and provides trusted, independent insight with the aim of helping, promoting and analysing the latest developments for mortgage professionals.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Mortgage Strategy Events
Be the first to hear about our industry leading conferences, awards, webinars and more.

Research and insight
Take part in and see the results of Mortgage Strategy's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now