IFAs expect 90 percent increase in alternative forms of annuities as annuity rates continue to fall according to MGM Advantage Annuity Index

New research1 from MGM Advantage, the leading retirement income specialist, reveals nine out of ten (90 percent) independent financial advisers (IFAs) surveyed think the downward trend in annuity rates will lead to an increase in demand for alternatives to conventional annuities. In contrast, just five percent of IFAs think rising annuity rates will create more demand for conventional annuities. The research, conducted amongst 115 of the UK’s leading IFA annuity specialists, also shows how an increase in ‘third way’ or alternative products is seen as the most likely outcome following the removal of Compulsory Annuitisation at Age 75.

The Analysis tracks the income paid on enhanced and conventional annuities on a quarterly basis, shows that since launching in June 2009, the Index has fallen six out of seven times it has been updated. Specifically in the three months between March 2011 and June 2011, the average conventional and enhanced rates fell by 0.18 percent and 3.50 percent respectively. Aston Goodey, Sales and Marketing Director at MGM Advantage, comments: “We think the downward trend for annuity rates is likely to continue and given this, conventional annuities are going to become increasingly unsuitable. People need to make sure their pension pot works as hard as possible for them and the best way of doing this is to look to annuities paying an enhanced rate.” The research also shows that the majority of IFAs (59%) think that allowing clients to remain in drawdown beyond Age 75 introduces them to increased risk.  Aston continues, “We fear for those people who will now drift along in drawdown as they are no longer obliged to purchase an annuity at Age 75. Not only are there long-term risks associated with inflation but the investment returns that compensate for the absence of mortality cross-subsidy become increasingly unrealistic.” Mortality cross-subsidy is the process of pooling the funds of annuity policyholders who have died earlier than expected and sharing these among remaining customers. You don’t get mortality cross-subsidy with income drawdown. At MGM Advantage the mortality cross-subsidy is awarded in the form of a Lifetime Bonus.

1 Research conducted in July 2011 amongst 115 IFAs by MGM Advantage.
2 Annuity rates are based on analysis of data from Investment Life and Pensions Moneyfacts by MGM Advantage.