Third Way Products
For many years there was only a choice of annuity and income drawdown. But in the past few years other options have been introduced. These are known as "third way" products. Generally, third way products are based on income drawdown legislation. There are two basic types - a temporary annuity and a guaranteed income drawdown.
Guaranteed Income Drawdown - income version
There are currently three such providers (as at September 2012). It is a style of product that has been popular in America for many years, known there as a "variable annuity". In many ways it works like an annuity, as the income it provides is guaranteed, yet the fund remains invested. If the fund grows, then the income could actually increase.
Typically, the amount invested in shares will be limited, but could be as high as 70%, depending on the provider. Regardless of performance, the income will not fall.
Income levels vary from provider to provider, an example of one of the highest paying has the following income levels (as at September 2012).
Age
55 - 64 4%
65 - 69 4.5%
70 - 74 5%
75+ 5.5%
The yield from this type of contracts is below that of an annuity, and that is the main disadvantage, although not that much for a typical joint life annuity. However, if the fund grows, then the income could go up and any increase is then guaranteed. It is more expensive than standard drawdown arrangements because of the cost of the guarantees.
The fund is not guaranteed and could go up or down, it is the income that is guaranteed. At any time it would be possible to buy an annuity with he fund, although what it would provide would not be known.
It is even possible to just take the tax-free cash and delay the income. This has the effect of providing a bigger, guaranteed income at a later date.
This offers a "real halfway house". It does offer a guaranteed income, yet allows the fund to stay invested, so have the flexibility of income drawdown.
Death benefits for this type of contract can follow normal drawdown options or a continuing guaranteed income for a spouse, depending on what you select. Contact us to find out more.
Temporary Annuity
In a nutshell, a temporary annuity can provide you with a lump sum and an income. You select the term and at maturity, it provides a known (lower) figure in return. This money is then used to buy another temporary annuity, conventional annuity, or drawdown. In some ways, it is similar to a drawdown contract, but has less investment risk, since you know at the outset what your "fund" will be worth.
The advantages:
- It defers annuity purchase
- Provides a guaranteed (temporary) income
- Provides a known return
- If health deteriorates then a future annuity could pay more
- It can be combined with "value protection" to provide lump sum death benefits
- This offers some flexibility and removes the investment risk, as you know what the fund will be. However, you still run the interest rate/annuity rate risk
The main criticism of this type of contract is that the the fund will be lower and it lacks flexibity.
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