Driven by increased competition and innovation, the British fixed-term annuity market will witness explosive growth and total annual sales will more than double to £1 billion, provider MetLife has said. However, a PICA (Pension Income Choice Association) board member differed on the growth rate.
With new entrants pushing up sales, currently the fixed-term annuity market is estimated between £350 million and £400 million.
The growing concern for healthy life expectancy coupled with an increasing interest in alternative solutions to traditional annuities and the need for retirement income flexibility will drive the growth in fixed-term annuities, the provider said.
Non-retired individuals aged over 60 were concerned over the impact of ill-health in retirement, MetLife’s survey of 1000 individuals found, although most were yet to take action. 62 per cent of the respondents were worried about ill-health in retirement, though only 27 per cent made financial preparations for it, the research found.
About three quarters of the current lifetime annuity savers falls within the ideal fixed-term annuities premium contribution of between £10,000 and £100,000, with buyers aged between 60-65 years purchasing 60 per cent of the annuities in the first quarter of 2011.
Income drawdown savers with large pension pots looking for tax benefits can also profit from fixed-term annuities, the report observed.
“Clearly fixed-term annuities are not suitable for all, but they enable advisers and clients to make a choice based on their circumstances now, and then change their mind in the future as their circumstances change,” said Dominic Grinstead, managing director of MetLife UK.
However, not everybody shares MetLife’s optimism. Though fixed-term annuities had strong potential for growth, the provider’s projection was “aggressive”, said Steve Lowe, management board member of PICA.
Strong growth was likely nonetheless, due to the demise of traditional annuity.
“Why would people in good health buy a standard-rate lifetime annuity and lock themselves into low rates when there are more flexible options out there?” asked Mr. Lowe.
Presently about 4,500 IFAs used fixed-term annuities and with RDR approaching, it remains to be seen how quickly another 20,000 IFAs adopted them, he said. “I hope that MetLife’s direction is proven right,” he added.