Drawdown drawbacks

As drawdown clients get older they face increasing risk when it comes to maintaining their income levels, MGM Advantage has suggested.

The firm compared income available from a £100,000 pension using a drawdown product and an investment-linked annuity, and found that the annuity would pay the same level of income as the drawdown but with a lower level of risk (or a higher level of income with all else being equal).

The comparisons the firm considered compared clients aged 65, 70 or 75 through to age 85 and 90.

MGM Advantage Pensions Technical Director Andrew Tully explained that as age increased so did the risks of drawdown, but options outside of drawdown do exist.

Tully did stress that whilst investment-linked annuities could help, they would not be for everyone as some people like to retain access to their fund.

To read the full article, click here.

Source: Banking Times

Investment-linked annuities - a flexible approach

Andrew Tully explains how, by offering a flexible income similar to income drawdown, investment-linked annuities could be ideal for older clients.

Source: Investment Life & Pensions Moneyfacts

Income drawdown has had a tough couple of years, with sales falling and regular negative media coverage. But, helped by the Government’s decision to reverse income to the old 120% level, reasonably healthy investment markets and low annuity rates, the outlook is more positive. And that’s good as drawdown is a valuable tool for advisers and clients.

But while drawdown is suitable in some situations it does have weaknesses. A key one being the increasing risk capped drawdown customers face as they move through their 70s.

So it’s important people consider when and how they will leave drawdown. And that’s where investment-linked annuities can be very useful. They allow people to maintain the investment exposure and income flexibility they have been used to, while also taking declining health into account and reducing risk by benefiting from the cross subsidy available within an annuity. Investment-linked annuities offer people a flexible changeable income, in a similar way to drawdown. Maximum income for a healthy individual is broadly similar to drawdown.

But annuities can also take health and lifestyle into account, which means the many people whose health deteriorates during their time in drawdown can get a significantly higher income from an investment-linked annuity.

In addition, one of the key benefits of an annuity, mortality cross-subsidy, has an increasing importance as people grow older. On death any remaining fund - after death benefits are paid - is pooled for the benefit of other annuitants. This is the reason why annuities can pay out a guaranteed income even when someone lives beyond their expected lifespan.

With investment-linked annuities the benefits of the mortality cross-subsidy are built into the product as yearly bonuses, and this allows customers to reduce their dependency on investment returns. For example, if we assume an income drawdown customer would  need a 6% yearly investment return to maintain their income, an investment-linked annuity would only need a return of around 4% for someone who entered the contract at 70 and lived to 85. For someone entering at 75 and living to 90 the difference is even more stark, with only a 2.5% investment return required – as the cross-subsidy ‘makes up’ the difference (i).

Income drawdown can be hugely beneficial for some clients. But it is unlikely to be a suitable contract for the majority of older customers. An investment-linked annuity can offer much of the same flexibility as drawdown while also offering a higher maximum income to the many who are suffering from some impairment. And, crucially, the benefit of cross-subsidy can greatly reduce the investment risk for these older clients.

 (i) Calculations by MGM Advantage. Income taken 100% of GAD tables, same charges for both contracts. For professional advisers only.

The full article is available in the September edition of  Investment Life & Pensions Moneyfacts.

Fixed-term annuity savers hit by low investment returns

Savers who bought a fixed-term annuity five years ago could be left up to 18 per cent worse off than someone who bought a lifetime annuity.

Enhanced annuity specialist MGM Advantage has analysed the total retirement income a 65-year-old man with a pension pot worth £100,000 would receive if they had bought a five-year fixed-term annuity on 1 January 2008.

The provider’s analysis assumes that at the end of the term the individual buys an annuity based on their health at the time. To find out why a fixed-term annuity is not a no-risk product, follow this link to the full article from Money Marketing.

OMO is no use without advice to shape retirement choices

  

The Association of British Insurer’s (ABI) new retirement choices code of conduct was introduced on 1 March 2013, continuing the work of increasing the number of people who shop around for annuities as they reach retirement. However, searching the open market for the best rate is only relevant after the most appropriate shape and type of annuity has been chosen.

With the growing competition for business from non-advised and execution-only offerings, it is crucial advisers define and position their services correctly. They may want to set a minimum pension pot size they will advise on or pass on small cases to another firm.

Shopping around is not simply about finding the best annuity rate..

To read the full article, please follow this link

 

 

Shopping around - the Open Market Option

The Association of British Insurers (ABI) introduced a new retirement choices code of conduct from 1 March 2013 which will help people who are approaching retirement. So what is the relevance of this code and what does it mean to MGM Advantage?

When people reach retirement and want to turn their pension savings into a retirement income they don’t need to stay with the provider with whom they have built up their pension. Instead, they may want to buy from another provider who offers better rates or a different type of retirement income product.

There has long been a requirement for all providers to tell people about this option to shop around for the best deal (known as the open market option or OMO). But, unfortunately, some providers have been less than clear, sometimes ‘hiding’ the OMO information within their retirement packs, which they are required to send out approximately 6 months and 10 weeks before retirement.

This is clearly illustrated by the fact that more than half of retirees simply buy their annuity from the holding provider, with many losing thousands of pounds each year as a result. This consumer detriment has been the focus of much pressure over the last few years – from media, Government, and organisations such as the Pension Income Choice Association (PICA) of which MGM Advantage is a founder member.

The ABI code is an attempt by providers to encourage more people to shop around for the best deal. The code requires providers to take a number of steps including clearly highlighting the ability to shop around. The code also means providers can’t include an application form or ‘tick here and return’ option within the retirement packs, which forces customers to take some action. Both through the retirement packs, and when approached by a customer about their retirement options, a provider must:

·       Explain the benefits of shopping around and that other providers might offer a higher level of retirement income;

·        Highlight that the provider might not offer the annuity options or product that best meets the customer’s needs;

·        Explain to the customer how to shop around and encourage the customer to seek further advice and/or information about this;

·        Ask various questions (about inflation, any partner or dependants, medical/lifestyle conditions) and highlight the risks of any answers. For example if someone says they are married but asks for a single life annuity the provider must highlight the risk this creates.

In addition providers are required to start communicating to customers between two and five years before their selected retirement age, which will hopefully encourage people to start considering their options at an earlier age.

MGM’s project to make the required changes to our customer retirement process was implemented on time, so our customers in heritage contracts such as personal pensions, stakeholder pensions and occupational schemes will receive retirement packs which meet the ABI’s new requirements.

In a wider context, these, and other related, changes mean more people approaching retirement will shop around for the best solution to meet their retirement needs. This means more people will consider our enhanced annuity and investment-linked annuity contracts. For example, where people shop around more people buy an enhanced annuity than a standard annuity.  However, where they stay with the provider with which they built up their retirement benefits only 4% buy an enhanced annuity. So if more people shop around, the enhanced annuity market will grow further and faster - it is already growing as more of the baby boom generation reach retirement, and more people have savings in defined contribution pensions and so need to turn those pots into a retirement income.

 

Autumn Statement 2012 reaction

It’s extraordinarily disappointing that the Government has decided to penalise pension saving again within today’s Autumn Statement. It appears no Government can resist this seemingly easy option. The most significant changes mean the annual allowance will fall to £40,000 a year, and the lifetime allowance to £1.25m, with effect from 6 April 2014. This is down from the current limits of £50,000 and £1.5m which have only been in force since 6 April 2011.

The changes will primarily affect people in defined benefit schemes. These are not necessarily the very richest, but could be moderate earners who have worked in the same profession for a long period of time, such as teachers, doctors and civil service workers.

While this is a short-term win for the Treasury, in the longer term it will have a detrimental impact on savings in the UK. We need a simple, consistent savings system that people can trust. And which encourages them to save without having to worry rules will change, yet again, next year or the year after. Perhaps now is the time to take long-term pension decisions out of the hands of politicians by forming an independent pension commission.

Surprisingly the Government has also u-turned on capped drawdown, pushing the maximum income back to 120% only 18 months after reducing it to 100%. I recognise there is an urgent need to help people who have seen a significant fall in their drawdown income. However we have to tread with caution as funds can be quickly diminished by taking 120% each year.

So a balance needs to be struck between short-term income needs and ensuring income is secured for life. The risks of remaining in drawdown increase substantially as people get older, so many will wish to consider some form of annuity once they’re in their 70s.

Retail Investment and Retirement Solutions report

You could do a lot worse than get yourself a copy of the Retail Investment and Retirement Solutions report from Clear Path Analysis.

Legislation changes, particularly the Retail Distribution Review (RDR), National Employment Savings Trust (NEST) and Solvency II, in addition to the current economic market turbulence and future uncertainty are altering investors, advisors and product providers’ attitude and approach to the market place. This reinforces the need to stay abreast of the ever-changing outlook and ensure these changes create opportunities, not challenges.

‘Retail Investment & Retirement Solutions 2012’, is the second report in its series which looks at the evolution of the retail investment and retirement solutions sector and the preparation considerations as we draw nearer to the enforcement of regulatory changes.

Key topics:

• Adapting your business model and refining your fee structure for an RDR world
• Examining the impact of other regulations including NEST and Solvency II on the retail
investment and retirement solutions market place
• Considering the merits and suitability of certain retail investment products
• Evaluating methods of achieving income in a low interest rate environment and protecting portfolios against inflationary changes
• Evaluating the developments in the retirement solutions sector and which solutions to consider

The effect of gender neutral pricing

The next phase of the long running saga introducing gender neutral annuity rates is fast approaching. But the position is far from certain with many complexities sure to exist after the changes take place. All of which means there are many issues for advisers to take into account when advising clients both before and after 21 December 2012.

While many may disagree with the European Court of Justice (ECJ) decision, the headline change to treat men and women the same sounds relatively straightforward. But, as with all pension changes, things are more complex than they first appear. This change will affect different contracts in different ways, and cause confusion for customers.

Standard annuities

Rather than having different rates for males and females, standard annuities will have one gender neutral rate from 21 December 2012. This is likely to mean male rates fall 3% to 4% and female rates edge up slightly by 1% or 2%. Therefore male clients wanting to buy an annuity may believe it is sensible to do it before December. However buying an annuity solely because of the gender changes may not be the right decision. Rates could, after all, spike up in future due to gilt yield rises or competitive pricing.

Somewhat bizarrely, standard annuities bought by those in occupational pension schemes (OPS) are not affected by this ruling. As the Treasury has chosen not to ‘gold plate' the EU legislation to incorporate OPS, it appears this is a position we will have to live with - at least until a further case is taken to the ECJ. Advisers will have to take this into account as part of their advice process after 21 December. For example, a female in an OPS may benefit by transferring to a personal pension before buying an annuity as they will move to gender neutral rates.

Enhanced annuities

Underwritten annuities may not be affected to such a degree as standard annuities. This is because the risk assessment element of pricing takes into account a whole range of factors - such as health, lifestyle, occupation and postcode - not just gender. So while there may be some tweaks to pricing, rates may not move across the board in the same manner.

Income drawdown

Currently there are different Government Actuary Department (GAD) tables for male and female drawdown customers, but this would breach the new rules. This put HM Revenue and Customs in an awkward position as it needed to give providers new GAD tables in sufficient time for system changes to take place. However GAD rates are based on market annuity rates and we don't know what gender neutral rates will be until after 21 December - and realistically it will probably be a few months later until rates settle down.

So, from 21 December everyone will use what are currently the male GAD tables, which is a pragmatic solution. This means females who take out new drawdown contracts from 21 December will be able to take a higher income than would otherwise have been the case. For drawdown arrangements already in place a similar increase may kick in at the next review or an earlier date if there is some other change which means income needs to be re-calculated (such as additional funds being designated to drawdown). The extra income available depends on age but it is approximately 4% more for a 60-year-old and 8% more for a 75-year-old. There is no change for males.

HMRC will review the situation once it becomes clear how the gender changes are affecting market annuity rates. As this is likely to be a temporary solution, advisers may want to provoke a drawdown review for their female clients to lock in a new higher income for the following three years. However, as many other factors such as fund value and gilt yield affect this calculation, care needs to be taken. In some cases income may fall despite the male GAD rate being used.

Andrew Tully, Pensions Technical  Director

(First appeared IFAonline.co.uk 25th Sept 2012)

Clients thinking of retiring abroad?

Retiring abroad is a dream for many people.  The thought of an easier pace of living, better weather and potentially cheaper property than the UK can prove a strong draw.  But without the right planning and advice you can quickly get caught out by the local tax laws.  And that is before you even look at your pension and other financial arrangements.”

 Here’s some Top tips to pass on to your clients who may consider retiring abroad:

1. Get an estimate of your state pension herehttp://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008
2. Seek independent financial advice (obviously)
3. Ask HM Revenue and Customs for information about any UK tax liability you may have even though you are living overseas
4. Check what reciprocal agreements are in place with the destination country regarding your UK state pension
5. Find out about your welfare rights while abroad
6. Check the cost of healthcare in the country you are thinking of moving to
7. If you decide to keep your property in the UK you will need to let your mortgage provider and insurance company know if it will be rented or remain empty
8. Do your homework on the cost of living in the country you want to move to
9. Notify utility companies, financial institutions and your local council when you are leaving
10. Contact the electoral register, and arrange for mail forwarding via the Post Office

 Check out the Retirement blog on: http://www.mgmadvantage.co.uk/blog/retiring-abroad-thinking-of-retiring-abroad/

Annuities and drawdown

There has never been a more daunting time to be considering retirement.  The financial markets are in a constant state of flux.  Inflation, although seeing recent falls, will come under pressure with the US drought potentially causing food price spikes.  Annuity rates are at an all time low, with the latest findings from the MGM Advantage Annuity Index revealing annuity rates having fallen by 14% since June 2009.  And clients in drawdown are seeing income falling as much as 50% following reviews.  It must leave you wondering how much worse it can get.

Clients approaching retirement may be finding their options unappealing.  They can defer taking income from their pension.  But for many this isn’t an option, they need the income now.  For others, deferring may help if markets recover, but there is also a risk in delaying annuity purchase. In the meantime, the bigger question (especially for those invested in lifestyle protected funds) may be will annuity rates recover?  Although there will be some upward movements, I believe the overall trend for the next few years will continue to be downwards.  There are simply too many factors at play putting pressure on annuity rates.  Over the next year or so we will see the introduction of equal rates (pushing down male annuity rates when currently 82% of annuities are bought by male clients), Solvency II increasing insurers’ capital requirements, ever-increasing longevity, and low gilt yields put under even more strain by the recent round of quantitative easing.

Many clients will be best advised to consider enhanced annuities, if they have the lifestyle or medical conditions to qualify.  Our data reveals the difference in income between the top enhanced annuity rates and bottom standard annuity rates come to 43% for men and 46% for women. Enhanced annuities have clearly come of age - last year they rivalled conventional annuities in the advised space for top spot in the sales charts.

The other traditional income option has been drawdown, but this has also seen its fair share of woes recently.  Falling markets, new (lower) GAD tables, and lower income limits of 100% (rather than 120%) has put some off entering drawdown, and many of those who have just gone through their five-yearly review have seen their maximum income levels fall dramatically.

Fortunately, the time when the retirement income market consisted primarily of conventional annuity and drawdown is long gone. The size of the market has increased exponentially over recent years, as more people approach retirement with a defined contribution pension pot.  Products such as flexible annuities are fast attracting followers, with ABI statistics show investment annuities now make up 7.3% of the advised retirement market¹, compared to only 4.7% in 2009¹. This is in part due to their ability to offer some form of guaranteed income to clients, whilst the funds remain invested and are able to benefit from any surges in market performance. Over the long term this provides the potential to stave off the effects of inflation and help clients retain the same standard of living throughout retirement, or even the possibility to grow their retirement income in real terms.

Choosing the best retirement income for your clients is not an easy task. One single solution may not suit a client’s myriad of needs, and instead advisers will be putting together a retirement income portfolio using several of the different product solutions on offer. Although falling annuity rates and the new drawdown rules makes life tough for those approaching (and in) retirement, it’s still possible to devise a retirement income solution that will help meet your clients changing needs for the whole of their retirement.

1 ABI stats, 2009 and first quarter of 2012, by premium

A lifetime of change

‘Jubilee Fever’ has hit Britain. Everywhere you turn there is a flurry of red, white and blue, as well as a nostalgic – or otherwise – look back over the Queen’s reign.

Over the last 60 years, Britain has changed enormously. We are (generally) enjoying a much better standard of living - better housing, better food and nutrition, and better medical care. And as a result, people in the UK are living for longer.

Wind back the clock 60 years and there was 6.8m pensioners living in the UK. That has now doubled to 12.4m, making up a staggering 20% of the population. And it isn’t just more people are reaching ‘pensioner age’, the number of ‘very old’ is also increasing fast. There is a staggering 44 times more centenarians now (13,420) than there were 60 years ago (300).

Greater life expectancy is a good reason to get the bunting out. But it’s also worth considering whether our pension system has kept up. Back in 1952, the state pension was £1 12s a week (almost £40 in today’s money).  Today, it’s about to undergo some big changes. As well as pushing back the age people can claim the basic state pension – gradually to age 68 – Steve Webb, the Pensions Minister, also plans to create a flat rate pension of around £150 a week. Whether he can get past the complexities of the UK pension system – such as contracting out – and achieve this without too many people complaining remains to be seen. But he is determined to give it a go.

However, what is becoming obvious is for many is even a basic state pension of £150 is not enough. More people, realising their current financial resources aren’t going to provide enough, are choosing (or being forced) to work past age 65. So it’s becoming imperative to make the most of the private pension savings you have.

Fortunately the retirement market appears to be keeping up with the pace of change. Long gone are the days where the only solution was a conventional annuity. Nowadays we have a myriad of options – including enhanced annuities, drawdown and flexible annuities. But we need to make sure people take advantage of this wealth of choice, and get the advice they need at retirement. Otherwise, the next 60 years will not be looking as rosy for the UK’s pensioners.

Annuities: Will there ever be a good time to buy?

We often wish for a crystal ball in life. Knowing what was around the corner could make some of our big decisions easier, including our financial decisions such as when to buy an annuity. With annuity rates at a depressing low, many people are toying with buying an annuity now or putting it off for a few months until rates (hopefully) recover. But with a range of legislative, regulation and market changes on the horizon picking the right time may prove problematic.

Over the past few years annuity rates have fallen steadily, partly because of market uncertainties, quantitative easing and increasing longevity. Although there may be a few upward blips over the next year or so, it is unlikely that this downwards trend will be reversed. Certainly the continuing improvements in longevity means it is doubtful annuity rates will soar any time soon. But there are other factors at play which will also have an effect on future annuity rates.

Market factors affecting the cost of gilts continue to cause havoc. With the latest round of uncertainty in the Eurozone created by the Greek election, it’s increasingly becoming a case of asking ‘when’ Greece will leave the Euro, rather than ‘if’. The timing and manner of its departure – measured and planned or chaotic and untidy – will put pressure on UK gilt yields as investors flock to find safer alternatives, and so lowering yields.

There are also a couple of key European legislative changes which will have big repercussions for the UK annuity market. The European Court of Justice gender discrimination ruling means from December this year annuity rates have to be the same for men and women, but only if the annuity is bought from a contract-based pension, including group personal pensions. Annuities bought by occupational schemes can continue to use gender as a factor when determining rates.

Currently, women are offered lower rates than men because, on average, they live longer. It may, therefore, be advisable for men to buy their annuity now rather than later when rates may fall. And, on first glance, women may think about delaying buying their annuity until later in the year. However, as over 80% of all annuities bought are bought by men, it’s highly unlikely women will benefit from a sharp increase in annuity rates after December. And any small increase in rates could be wiped out by other movements in annuity rates caused by other market factors.

The other big piece of European legislation is Solvency II, which is due to be introduced from January 2014. Currently, its exact effect on UK pensions is unknown, as we still wait for vital detail and final rulings. At its heart is the basic principle of making sure providers hold sufficient capital. And although, the impact doesn’t look as significant as originally predicted it is still highly likely that annuity rates will noticeably fall. The only question is by how much?

With an increasingly sophisticated retirement market, there are a number of product solutions that could possibly help people hedge their bets on predicting annuity rates. Drawdown allows people to put off buying an annuity until a more suitable time, but it has also seen income constrictions caused by low gilt yields, lower GAD tables, and a reduced GAD rate of 100%. Others may want to consider investment-linked annuities, which whilst still benefiting from any upside from market growth, also allow a 120% income withdrawal.

Fixed term annuities are also being seen as an alternative to lifetime annuities. But although they may give clients who become ill wriggle room to buy an enhanced annuity later on, they may not prove that useful in avoiding low annuity rates. After all, few would predict annuity rates will be higher in five years’ time. And a guaranteed capital return, incorporating a low investment return, coupled with lower annuity rates may simply mean that the client, at best, can continue to buy the same level of income as they originally set out with, rather than seeing their income rise.

Instead of playing timing guessing games, the conclusion may simply be for clients to buy an annuity when they need the income. The focus, instead, should turn to product solutions. Increasingly more people should not be settling for a simple lifetime annuity. Instead, their medical and lifestyle factors may mean they can qualify for an enhanced annuity. In addition, a growing number of retirement products allow clients to build in much-needed flexibility to suit their changing needs and circumstances.

These days, a crystal ball may no longer be as useful. Instead, the retirement product choice is growing as important – if not more important – than the timing.

Article first appeared in Professional Adviser (May 2012)

120% maximum income is here to stay

Last year the maximum income for the now renamed capped drawdown fell from 120% to 100%. 


But it would be a mistake to think this reduction applied right across the board for retirement income products. Instead, the maximum income for flexible annuities remains at 120%. The reduction to 100% was made amidst growing concerns that income drawdown clients who were taking the maximum income could run out of funds and end up relying upon the State for additional income. But there was no need to make a similar change for flexible annuities. 


Clients don’t run the same risks of fund depletion because the two product types are fundamentally different.

For the full article read more here

Cost of Delay

As annuity rates are falling, delaying decisions about retirement can mean missing out on potential income. It can take years to recoup the income lost over the intervening period if your fund value remains flat.  For example, a 65 year old man can buy a yearly income of £2,856 with a pension fund of £50,000, but a 67 year old man in the same situation could obtain a better annual income of £3,036. If the younger man delays buying an annuity for two years in an attempt to gain a higher income, with all the factors remaining unchanged, he will have given up a total of £5,712 (£2,856 for each years delay) in order to boost his annual income by £180 (The difference between the 65 and 67 year old). At that rate it will take him 32 years to recoup the income by deferring his income for two years. 
For the full article read more here