Insured Retirement Plans - tin foil, armour plating or gold leaf?

By Tom McPhail | 11 Jun, 2008 

For pension investors who are reaching retirement, there is now an alternative to the established choices of an annuity or an income drawdown plan; it is the option of an Insured Retirement Plan (sometimes erroneously referred to as Variable Annuities). 

These plans operate in a similar way to drawdown – your pension fund is invested in a range of funds, and you draw an income from these investments. The difference these IRPs have, compared to an ordinary drawdown is that they have an insurance underpin. This means that even if your investments collapse in value, you have a guarantee that your income will not go down.

This is right up there with Motherhood and Apple-pie: I don’t know many investors who would reject the proposition of equity market returns, combined with protection that means you can’t lose. Unfortunately (and perhaps predictably), it isn’t quite that simple.

For a start the guarantees tend to be expensive; very expensive. You could end up sacrificing in excess of 1% a year in investment growth. In addition, the guarantees are not absolute, so for example your income might not go down, but in a worst case you would still suffer the corrosive effect of inflation on your standard of living. Worse still, the guarantees on these plans tend to run out at age 75, just when you might want to convert to annuity; the result could be a catastrophic drop in income.

There are now four companies in the UK offering these IRPs, the latest (and the most straightforward) being Aegon. We have taken a long, hard look at these plans, the guarantees they offer and the price they charge. For now we don’t think that they represent good value for money. There will be more of these types of retirement plan and they will continue to evolve, so we will be keeping a close eye on this end of the pensions market.