The over 50s are facing a retirement funding shortfall and are shouting out for alternative investments to bridge the gap between their expected pension and the money they feel they need to finance their later years.
The investment poser for the over 50s fast approaching retirement is market volatility.
Many can afford to invest more to upgrade their pensions, but fear more aggressive investment because recent market behaviour injects the worry that they may lose more than they gain.
This has left hundreds of thousands of investors scratching around for retirement funding options that are not really there, says Axa Life Invest managing director Simon Smallcombe.
His opinion is unit-linked guarantees will gain in popularity as a retirement funding alternative while interest rates and annuity rates stay low.
Risk assessment
One of the main differences between the guarantee and an annuity is the term – an annuity is for life, but the guarantee is not.
Smallcombe believes they have less risk attached than investing directly into stock markets because they link insurance-backed protection with an income.
Insurance linked securities are the point where capital markets converge with insurance markets.
The capital market provides the funding, while the insurance market offers protection. The security works by off-loading the risk of funding on the capital side across a pool of investors.
Axa claims the guarantees offered an average 5.55 to 10.5% return to investors last year.
However, the structured product is relatively new to the market, and although Smallcombe claims the unit-linked guarantees are gaining traction with advisers, he also admits no one really knows how the security will perform in the medium to long term.
Unknown performance
“We just do not know how the income will perform in seven years time. The annuity market could change in that time. The guarantee does let a retirement saver plan now for whatever tomorrow may hold,” said Smallcombe.
“The issue is how advisers will approach the product. Early adopters are using them widely with clients, but others feel too much of a cost is attached to the product.
“The guarantee does come with an additional cost, but as we are not pricing in a fee, it’s as cheap as we can make it.”
Cost is not the only issue that comes with unit-linked bonds – the complications of the product are also off-putting for some investors.
“The product is simply an insurance providing a future guaranteed income,” said Smallcombe. “The product links investment and insurance.”