Reinventing retirement income products

The product also allows clients to participate in changes in interest rates, so that if rates rise before clients lock their assets into the preservation phase, they can benefit from a higher guaranteed payout rate.

“It’s absolutely an alternative for a client who may have in the past traditionally bought an annuity to get that guaranteed stream of income, but shied away from it given that rates are low and therefore the payouts are low,” says Steven Parker, assistant vice president, guaranteed investment products, retail markets with Manulife. “Here’s an opportunity where they can have the ability to get back to those higher payout rates through rising interest rates.”

These features, however, come with a price. The RetirementPlus product has fees that are about 50 basis points higher than the management expense ratio (MER) on the underlying investment fund that the client chooses.

Earlier this year, Toronto-based Sun Life Financial Inc. launched its own variation of an annuity, called SunFlex Retirement Income. It provides a guaranteed level of income in retirement, similar to an annuity, but with the opportunity for clients to earn potential bonus income in the form of market returns that are tied to the performance of certain mutual funds.

Both products cater to clients who are drawn to the concept of guaranteed income, but who want some upside potential.

“What we heard when we were designing this is that a lot of clients don’t want to lock into guarantees today that are based on low interest rates,” says Parker.

However, these kinds of products are not necessarily suitable for the same clients who are strong candidates for annuities. Given that this new generation of products incorporates equity market investments and exposes clients to fluctuating interest rates, the solutions are designed for clients who are willing to take on more risk than that associated with a traditional annuity.

“It’s certainly not for people who are risk averse, because you are taking some risk with what interest rates will do, and arguably, you’re also taking some equity risk there as well,” says Parker. “That traditional annuity investor, they don’t want any risk. They just want to give a lump sum of money and guarantee a stream of income for the rest of their life.”

Indeed, these alternative products suit the needs of a client with different priorities, says Peter Wouters, director of tax and estate planning with Toronto-based Empire Life Investments Inc.

“These products are great alternatives for people who want to take on some more calculated risk, but they still want that safety net,” says Wouters. “They still want some downside protection.”

These products also provide greater flexibility compared to a traditional annuity. For instance, clients with Manulife’s RetirementPlus product can access their capital at any time.

“It’s fully liquid throughout any phase of the contract, which is a differentiator from annuities,” says Parker. “We heard from consumers that they wanted flexibility.”

Some advisors are wary of products that combine an income stream with too many other functions and features, due to their complexity, and the high fees that are sometimes associated with these products.

“Everyone is trying to make [the annuity] better – new and improved, at a higher expense,” says Bruce Cumming, executive director, private client group, and senior investment advisor with HollisWealth Inc. in Oakville, Ont. “They’re fixing something that is really not broken.”

Cumming prefers to use traditional life annuities for clients’ retirement income needs.

This is the third article in a three-part series on annuities.