Insurers are targeting pension savers who do not want to get locked into
annuities by offering schemes that provide a guaranteed income for life with
access to your capital at any time.
Many savers resent buying an annuity when they retire because once you have
bought one you cannot get your hands on that money. Any funds that have not
been paid out as income when you die usually stay with the annuity company.
The new schemes are designed for savers who want more control over their
money. They pay out a guaranteed income, just like an annuity, but allow
most of your fund to remain invested until the age of 75.
Savers can withdraw money from the products at any time. Any left in the
schemes can also be passed to family members when you die, although there
may be an income tax and inheritance tax charge.
Billy Burrows of William Burrows Annuities, an adviser, said: “The schemes
provide the certainty of an annuity but with added flexibility. Depending on
investment returns, it may be possible to achieve better returns than under
an annuity.”
The plans take their lead from America, where such schemes have already
attracted a total of $133 billion (£68 billion). Hartford Life, a US
insurer, is now bringing its scheme to Britain. Savers in its Platinum plan
can invest in 85 funds run by leading managers including Fidelity, Jupiter
and New Star. Investors can put together their own mix of cash, bonds and
equity funds.
The scheme offers a guaranteed income dependant on age. For example, a 65 year
old would get 5.5 per cent at the start. The annual payments will eat away
at your lump sum unless investment returns of more than that amount are
achieved. But if the money runs out before the saver dies, Hartford will
continue to cover the guaranteed payment.
If the investments do well there is the ability to “lock in” growth of up to
10 per cent every year.
For example, if your fund was worth £100,000 at the age of 65, you could take
a guaranteed income of £5,500. If it was worth £110,000 a year later, the
guaranteed income level would rise to £6,050. This would then be protected
for life, even if your fund value subsequently fell.
The maximum age of entry is 70 and the minimum initial contribution, or
transfer amount, is £10,000. Annual charges on the underlying funds range
from 0 per cent to 1.1 per cent. The plan’s costs include an initial fee of
up to 6 per cent including advisor commission, and an annual charge of 0.75
per cent.
Met Life and Aegon have launched similar products that offer the potential for
a lump sum payout. The Met Life Trustee Investment Plan has a minimum
investment of £50,000 and allows you to take an income of up to 5 per cent
of your investment each year.
Aegon’s Five for Life also offers 5 per cent annual withdrawals and a life
annuity with a guaranteed income for life. It differs from the other two
plans because you cannot invest your pension fund in it. You can invest in
three funds with different amounts in shares and bonds. A fourth option
offers a guarantee of 4.5 per cent but with higher equity exposure. There is
no initial fee but annual charges on the underlying funds range from 2.25
per cent to 1.55 per cent.
With Living Time’s 75 Plan, investors buy an annuity for a specified length of
time before they reach 75. At 75 they receive a preagreed lump sum.
Some advisers have criticised the plans as an expensive way to secure an
income. Tom McPhail of Hargreaves Lansdown said: “They are costly and they
can be complicated. The high charges mean that they are not suitable for
savers with less than £100,000 to invest.”
Under Revenue rules, at 75 any lump sum cannot be taken as cash but must be
invested in either an annuity or an alternatively secured pension. Asps
allow retirees to continue to draw an income directly from their pension
fund, but the government has threatened to clamp down on the schemes.
It is feared that the Treasury may ban Asps or introduce a tax charge that
will make them so unappealing that most investors will be forced to buy an
annuity by default.
For savers forced to buy an annuity, there has been some good news of late.
Rates have plunged 70 per cent over the past 20 years, according to McPhail.
But over the past six months they have staged a slight recovery.
Annuity rates have risen up to 5 per cent since last September as interest
rates have increased, pushing up gilt yields.
Six months ago, a 60-year-old man with a £100,000 pension fund could have
bought an annuity from Scottish Equitable that paid an annual income of
£6,210. Today, the policy would pay around £6,400 — £190 a year more.
Most people use their pension fund to buy a standard level annuity. Although
these are essentially risk-free, once you buy one of these schemes your
income is fixed for life with no chance of an increase.
Advisers are therefore recommending that people approaching retirement
consider with-profits or unit-linked annuities that invest in the stock
market. Because your income depends on their performance, they are riskier
than level annuities.
The income you receive can fall if returns are poor, but there is also the
chance for it to grow.
Burrows believes with-profits annuities are attractive because the returns
needed to beat a standard annuity are fairly undemanding. It is one of the
few occasions when advisers would recommend a with-profits product.
He said: “There are risks, so the best solution might be to split the annuity
pension between standard and with-profits annuities. That way you are
getting the best of both worlds.”
YOUR CHOICES AT RETIREMENT
- Annuities provide a guaranteed income for life. Once you have bought
one you cannot get your hands on the money. Anything that has not been paid
out as income when you die usually stays with the annuity firm.
- Unsecured pensions let you leave your fund invested before the age of
75 so you don’t have to buy an annuity. You can take an income equivalent to
up to 120 per cent of the return you would have received from an annuity,
but you do not need to draw an income.
- Hartford-type plans offer a guaranteed income, just like an annuity,
but you can leave most of your fund invested. Savers can quit at any time
and take any remaining funds with them.
