Hybrid annuities take the cake

With many financial advisers avoiding traditional annuities for their retiring clients, product engineers have focused their energies on creating a new generation of hybrid annuities that will allow retirees to “have their cake and eat it too”, according to the director of the US-based Vanguard Centre for Retirement Research, Stephen P. Utkus.

Referring to the new breed as “guaranteed minimum withdrawal benefit (GMWB) annuities”, Utkus said by wrapping insurance around a unit trust, these hybrid annuities delivered guaranteed income while eliminating longevity risk.

Speaking at the SMSF Professionals’ Association of Australia national conference 2008, Utkus said GMWBs provide retirees with a set income each year that is guaranteed for the remainder of their lives, but also “ratchets up” with performance.

Whereas retirees have previously avoided annuities for reasons such as wanting control over assets or a lack of product knowledge, the new generation of products, which are already starting to emerge in Australia, address these issues.

The catch, according to Utkus, is that these benefits come with a high price, about 200 to 300 basis points.

“But look at what you get, no longevity risk, guaranteed income and you can take your money whenever you like,” he said.

Utkus added though that this strategy should be viewed as one of the building blocks of a comprehensive retirement plan that includes other strategies, such as a stock portfolio and 5 per cent payout fund for example.