Variable annuities have seen continued demand with only a seven per cent fall in the second quarter of 2009, despite difficult sales conditions, says Watson Wyatt.

The financial consultant has conducted research showing that second quarter variable annuity sales in the UK were £343.7million, compared to a first quarter figure of £370.2million. However, the Q2 levels match those reached in the final quarter of 2008.

"Despite the fall in sales relative to the first three months of this year, this is quite a resilient performance from the sector," commented Andy Sanders, senior consultant at Watson Wyatt. "There were a number of developments during the period including re-pricing exercises and product redesigns to allow for the increased costs of guarantees as well as the withdrawal of one of the leading product providers, the Hartford. It is apparent, however, there is demand for such products from a segment of consumers both approaching and at retirement."

Sanders said annuities and income drawdown are faced with consumers seeking alternatives to these retirement options, and therefore the prospect for variable annuities and other 'third way' designs is positive. "The eventual size of the variable annuity market will depend on the product design and costs matching consumer needs as well as convincing a wider cross-section of the population and the adviser community of the virtues of what is available. It will be interesting to see whether these challenges are left to the existing providers or whether there are others that feel the variable annuity market has sufficient long-term potential for them to pursue market entry."

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