Over the past 12 months, sales of variable annuities have increased by over a third – a sign that pensioners are being forced to take more risks with their finance to obtain their desired standard of living. Returns from standard annuities have fallen by over 20% over the last ten years which has made them increasingly less attractive to savers. In the first six months of 2010, the value of the sales in variable annuities rose to £445m which represents an increase of 34% on the same period last year.
Variable annuities are linked to the performance of investments, which allow the annuitant to potentially benefit from a higher annual income should these investments perform well. The downside is if the investments perform badly the annuitant could lose money. There is also no guaranteed income for life that is applicable when you opt for a conventional annuity. Instead the income is only guaranteed for a fixed period, typically ten years. This does mean a higher initial income but if rates fall throughout the duration of this period then annuitant’s income will fall as a consequence.
Billy Mackay from SIPPS company AJ Bell says that… “…variable annuities are often promoted on the back of their ability to provide access to a guaranteed income whilst also providing the potential for a future increase in income alongside control of the remaining capital on death. It is important that investors look to explore and understand the nature of the variable annuity and cost of the guarantee or promise. The vehicles used to back or provide for the benefit promise or guarantee can be complex and expensive.”
Variable annuities are in general most suited to those who have another form of income, as they can incur the risk of a falling income because they have another source of revenue. However, because of poor yield returns from government bonds, rising life expectancy and rising taxes, many annuitants have had to take on this risk because they simply cannot afford to live on the income from standard or conventional annuities.
