Long life, not according to the wife

• Males approaching retirement age¹ underestimate how long they will live by an average of 5 years
• Females sell short their life expectancy even further by an average of 10 years
• 79% of males approaching retirement age underestimate their likely longevity compared to 85% of females
• 15% of women don’t expect to live past age 70, compared to 16% of men
• Just over a third of 55-64-year-olds can’t see themselves living beyond age 75

New research¹ shows that 82% of people approaching retirement age are underestimating how long they are likely to live. Men aged 55-64 estimated their average life expectancy to be 81 years old and women estimated it to be 79. Official figures² show that the average 55-64 year-old is expected to live until 86 if male and 89 if female, meaning that men could be in retirement five years longer than expected and women for ten.

It is important that people have a realistic expectation as to how long they are likely to live, so that they can make adequate provision for retirement. The chancellor’s Budget changed the pensions’ landscape forever allowing people more freedom and choice with their pensions. We fully support the idea that individuals have more say over how they access and spend their pension savings.

With increased choice comes the risk that individuals may live longer than they anticipated meaning they may outlive their retirement savings. If you don’t plan properly then the funds built up could be exhausted in later life. This could lead to a decline in living standards and may come at the exact point you need regular income for things such as care fees.

Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income. The reality is simple, there is no other product in the market that offers such a high rate of return for life than an annuity.

1. Source: MGM Advantage research among 2028 UK adults, 314 of which were aged 55-64, conducted by Research Plus Ltd, fieldwork 17-22 October 2013. Respondents were asked “Being as realistic as you can, approximately how old do you think you’ll live until?”

2. Source: MGM Advantage analysis of ONS cohort estimates of life expectancy - 2012.

Enhanced annuity telephone service provides better customer experience and best rate

• 90% of application forms for enhanced annuities received by MGM Advantage are incomplete first time around
• Gap filling forms could provide on average a 3%¹ increase in the annuity rate offered
• Free telephone interview service launched to advisers to help improve service and rates offered to clients

MGM Advantage, the retirement income specialist, has launched a free client telephone interview service for advisers to use when providing advice on enhanced annuities. The in-house service aims to improve the experience for clients during the quotation process, remove the risk from adviser businesses from incomplete medical forms and ultimately offer a competitive annuity rate first time.

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The free telephone interview service aims to address many of the problems both advisers and providers face when trying to put clients on risk. We appreciate advisers are busy people, so the process has been designed to save them time, while also removing the risk of the complex medical forms being incomplete.

Our research has found customers often feel reluctant to disclose their full medical history to their adviser, which is entirely understandable. Our interview process is handled by trained individuals who know the right questions to ask for further clarification and disclosure. This ensures all relevant information is captured sensitively, which often can provide a significant increase in rate because we have a full picture of their health and medical conditions.

Jules Charrington, Chief Underwriter, MGM Advantage

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Upon completion of the telephone interview service, a PDF version of the Common Quotation Form (PDF CQF) is produced which is sent to the adviser, who can then, if appropriate, broke the market for the most competitive rate.

1. Source: MGM Advantage – over 2013 client rates on enhanced terms were improved by on average 3% following form gap filling.

The Autumn Statement 2013 - state pension ages will rise in the future

The Government’s autumn statement took place today. Here are details of the changes affecting pensions:

1.       State pensions: State pension ages (SPA) will increase again, as widely trailed overnight. The increase to a SPA of 68 will take place in the mid-2030s with a further increase to 69 in the late-2040s. Someone born today is likely to have an SPA of at least 72. The increases to 68 and 69, plus previously announced changes to 66 and 67, will save the Government around £500m over the next 50 years.

2.       Income drawdown: The Government has been conducting a review of income drawdown tables to see if the allowable income is reasonable – as some providers have been asking for drawdown income tables not to be linked to annuity rates and/or allow a higher income. The Government Actuary’s Department (GAD) has found withdrawal rates are a reasonable match to annuity rates, so the government will not change the basis on which the GAD tables are formulated.

3.      Class 3A voluntary National Insurance – In October 2015 the government will introduce a new class of voluntary NICs to allow pensioners who reach State Pension Age before 6 April 2016 an opportunity to top up their Additional Pension records. This is to try and help those people who won’t qualify for the new single tier state pension which is due to be introduced in 2016.

4.       Individual Protection – As a result of reducing the pension lifetime allowance to £1.25m from 6 April 2014, the Government has confirmed it will introduce individual protection 2014 (IP14) through the 2014 Finance Bill. Individuals who claim IP14 will have a lifetime allowance of the value of their pension savings on 5 April 2014 subject to an overall maximum of £1.5 million.

Billions wiped off retirees’ annuity spending power

Retirement income specialist MGM Advantage has revealed the true cost of inflation and how it will affect retirees' income over the coming years. Of the 400,000 people retiring each year who purchase an annuity, 90% choose a level income.

If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping £6.3billion off retirees' purchasing power over that period. MGM Advantage considers this a conservative figure and has based this on people retiring this year with an average pension pot of £33,000, choosing a level annuity with no escalation or index-linking.

Andrew Tully, MGM Advantage, said: "These figures show just how damaging inflation can be, wreaking havoc with people's pensions and wiping thousands of pounds off their income over time.

"People close to retirement have some very tricky decisions to make when looking to convert savings into retirement income. With record low annuity rates the obvious solution could be to shop around for the best starting income you can find. However, there are other ideas to consider which could help protect your retirement income from inflation.

 "With 90% of people retiring currently choosing a level income, we are storing up trouble for future years when you factor in the impact of inflation. While some economists forecast higher inflation over the short term, even if inflation remained at the target of 2%, the real spending power of peoples' income will reduce significantly over retirement. There are alternatives which may provide a higher starting income or the ability to hedge against the corrosive effects of inflation."


To read the full article in Investor Today, incluidng top tips for retirement, follow this link.

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.

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.

 

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)

RDR Toolkit Modules

MGM Advantage has produced a series of bite-sized modules to add to the RDR Toolkit, covering areas such as barriers to paying fees, overcoming objections, segmenting your client bank and more. Each module will be published on www.mgmadviser.com/rdr over the coming weeks.

Module 1: The effects of RDR on those advising individual clients on annuity and drawdown products.

Coming next...Module 2: Developing an advice proposition for retirement clients

Essential RDR Toolkit

The Retail Distribution Review (RDR) that comes into force on 1 January 2013 gives you the opportunity to reposition your business with prospective clients.

MGM Advantage has pulled together a toolkit to help you market your business, particularly to clients at the point of retirement. Including sales aids, case studies and a customer brochure, the toolkit spells out to clients why it is essential to take financial advice at retirement.

Commissioned jointly by MGM Advantage, Just Retirement, LV= the programme has been produced by a team of industry specialists each with complementary skills and practical experience of building a business and advising clients.

You can browse the toolkit contents on mgmadviser.com/rdr and order your free toolkits online.

Be quick while stocks last!

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