Pensions - Articles - Fixed-term annuities 'most vibrant sector'

 Strong growth in the fixed-term annuity market has established the innovative plans as a key option for
 modern retirees seeking to combine income certainty with flexibility, according to Just Retirement as it marks
 the anniversary of bringing its own FTA to market.

 
 The retirement specialist reported a positive start since last summer’s launch, with quote activity rising by 10
 per cent each quarter and applications rising more than 35 per cent quarter on quarter.
 “Fixed-term annuities have been around for a while but it is only really in the last year they have become
 established as one of the four options for retirement income alongside lifetime annuities, drawdown and asset backed.

 
 annuities” said Stephen Lowe, group director of external affairs and customer insight at Just
 Retirement.

 
 “Arguably it has been one of the most vibrant and innovative sectors and that looks set to continue. Three
 major players have entered the market, each with its own twist on the same theme. Many professional
 advisers now routinely make them an option to discuss and a wide range of clients are considering them as
 part of their retirement strategies.”

 
 Unlike conventional lifetime annuities which deliver a guaranteed income for life, fixed-term annuities pay the
 income for an agreed term, then at maturity return a guaranteed lump sum that can be used to buy another
 retirement income plan. They allow clients to take income but to avoid locking in to today’s lifetime annuity
 returns. Just Retirement pioneered an option allowing those diagnosed with health issues to exit during the
 term to switch to an enhanced annuity.

 
 Just Retirement said its average quoted client:

 
 - is a healthy male, aged 62 or 63 – one in four are women
 - chooses a term 6 years or under, only one-third opt for a different term
 - is looking to invest a pension fund worth £90,000
 - took maximum income available in 50 per cent of cases

 
 “The customer base is quite diverse,” said Stephen Lowe. “The flexibility is the key motivator, and often the
 fixed-term annuity is only one part of a wider pension strategy. Some are would-be lifetime annuity buyers
 who don’t want to lock in to today’s low rates while others are drawdown clients, perhaps nursing losses, who
 are worried about investment performance risk.

 
 “The term of six years works well with the need for drawdown reviews every three years. In 95 per cent of
 cases the client chooses Plan Protection which gives the flexibility to exit in the event of ill health and guards
 the value of the plan in the event of premature death.”

 
 He said that health remained a major factor in retirement income planning. “Most people in their early to mid-
 60s are in good health but they also know people who aren’t so lucky which focuses the mind on the ‘what ifs’”
 he said.

  

 “A 65 year old who does not qualify for an enhanced annuity has a 30 per cent chance of health deterioration
 within 10 years and a 40 per cent chance in 15 years. Often the best enhanced rate is available close to the
 point of diagnosis rather than when treatment is underway, which underlines the importance of the conversion
 feature.”

 
 Just Retirement expects the fixed-term annuity market to carry on growing, helped by increasing interest from
 professional advisers who are keen to discuss with clients the full range of alternatives.

 
 “Health can have just as big an impact on the returns an individual retiree can get from an annuity as any
 other factor” said Stephen Lowe. “Financial advisers are well placed to explain these issues and to make sure
 each retiree chooses the best options that suits their own circumstances.”