In theory, there should be a strong demand for innovative annuity products in the UK. After all, conventional annuities offer a known income, but at a poor rate in the eyes of many, while the perils of not buying an annuity on retirement, but remaining invested, have been graphically shown by recent market volatility.

Given this polarised choice, products offering a rising income, but with a guarantee for protection, should find a ready market among retirees and their advisers. But this has not been the case in the UK’s relatively small market for what are called either ‘third way’ annuities, variable annuities, guaranteed annuities or even unit-linked guarantees.

These products often pay an income to individuals, with a guarantee underpinning it, while also allowing some choice over where the underlying funds are invested. In theory, if the funds do well, the income can increase, while the guarantee keeps it from falling below a certain point.

Despite their theoretical attractions, new annuity products have faced a sceptical audience in the UK in 2008. This is mainly due to the after-effects of the credit crunch; customers have lost confidence in financial institutions and are shying away from new and seemingly complex products.

Their cause has not been helped by difficult market conditions. Two providers, Aegon and MetLife, have had to reprice their unit-linked guarantees, while a US third way annuity provider, The Hartford, pulled out of the UK earlier this year.

If another major UK life office entered this market, that would probably help raise awareness, but despite rumours, this has not yet happened, although it must only be a matter of time, given the market potential.

In the US and Japan, variable annuities, as they are called, are big business. The variable annuity market is worth over US$1 trillion in the US and US$140bn in Japan. One difference is that these products are often used as investments pre-retirement, whereas in the UK, variable annuities are only seen a product for the retired.

Perhaps the market for new annuity products will be boosted by European regulation. Experts have warned that Solvency II, a possible new directive on life office funding, could reduce conventional annuity rates by 20% if it comes into force. While the UK Government has said it will fight this directive, it could be the catalyst for growth in the unit-linked, or variable, annuity sector.