Newfangled annuities bring fresh doubts

LONDON (Citywire) - Billed as a revolutionary product for security conscious babyboomers, the introduction of US-style variable annuities has not been smooth. Having already been knocked as too expensive, with guarantees that aren't needed, critics are now attacking the language that insurers use when they sell the new products.

Variable annuities, which are also known as third way annuity products, were brought over from the US by providers such as the Hartford, Met Life and Lincoln. They seek to offer a guaranteed income in early retirement, while allowing people to keep their income options open and still receive some upside potential on their investments.

Many of the UK's big insurers have been pinning their hopes on the new products, but some industry figures - led by Hargreaves Lansdown - have been critical.

The company's pensions analyst Nigel Callaghan said the industry had ‘shot itself in the foot' by using complex terminology to explain its products, which was subsequently undermining product uptake.

‘Each insurer tends to use its own language, so when a potential investor first comes to try to decide on which, if any, of the products to use, they will typically end up with two, three or four product quotes and each one is describing a largely similar product but in completely different language,' Callaghan said.

Callaghan said investors had no hope in comparing products which even financial advisers with appropriate qualifications could not compare.

However, Callaghan was optimistic about the arrival of new players in the market - such as Standard Life, expected later this year - despite another potential layer of terminology for people to grapple with.

He believes that the increased number of players in the variable annuities market will have a knock-on effect on variable annuity rates - which have been criticised as expensive - and potentially catalyse a new wave of more affordably priced products.

‘If this product works in the same way as other products, when other manufacturers come to the market, costs are likely to go down,' said Callaghan.