Costly unit-linked guarantee myth challenged

Guarantees on unit-linked products are not overly expensive compared to alternatives delivering similar levels of income security and flexibility says a report from Retirement Intelligence for Axa Life.

The report confronts the view that unit-linked guarantees are expensive, arguing that the closest an adviser could get to a guaranteed income for life would be 15-year gilts, returning just over 2.5 per cent. Products such as Axa Life’s guaranteed option pay a guaranteed income of 4.25 per cent to a 65 year old, with potential growth as well, the provider says.

But advisers must improve their understanding of decumulation, retirement spending lifecycle and the pros and cons of blending different solutions to tackle the Budget changes coming in from April says the report.

Axa Life predicts an increase in variable, or so-called third-way annuities in the post-Budget world as a new generation of drawdown investors demand guarantees, stockmarket exposure and access to their cash. The report says advisers must overcome the ‘risk dilemma’ of taking too little or too much risk by becoming sophisticated risk managers in formulating retirement strategies for clients. A

Authored by Billy Burrows, the Retirement Intelligence report says: “Critics sometimes say the charge for the guarantee is ‘dead money’ because if equity prices fall soon after the policy is taken out, it might take a long time before the policy is ‘back in the money’.

“This is a question of timing. If equity prices fell soon after taking out a unit-linked guarantee the investor would have the peace of mind and security that their income would be guaranteed at the starting level.

“As with all investments, unit-linked guarantees are a long-term investment and if equity prices recovered in the future, the investment lock-in would kick in and the guaranteed income may increase.”