Savers who are reluctant to purchase an annuity on retirement but are not
prepared to take the risks involved with income drawdown are being offered a
third option.
Hartford Platinum, a new retirement plan from Hartford Life, the US insurer,
seeks to offer pensioners the best of both worlds: a guaranteed income as
well as the opportunity for capital growth.
Hartford is not the first company to attempt to exploit customer
dissatisfaction with conventional annuities. Living Time offers two “third
way” plans underwritten by another US insurance group, AIG.
The Living Time 75 Plan pays a guaranteed income as well as an optional
guaranteed death benefit and returns a predetermined sum on the day before
the policyholder’s 75th birthday. These funds can then be used to buy a
conventional annuity or an alternatively secured pension (Asp).
The Living Time Income Plan works in a similar way, except that it offers a
higher potential income and has a variable term, starting from a base of
five years.
“This is the middle ground in a polarised industry,” says Michael Thraves, of
The Annuity Bureau, the specialist independent financial adviser (IFA). “We
expect a number of different providers to try to capture this middle ground.”
Aegon/Scottish Equitable is considering entering the market this year and
others are likely to follow.
The annuities market is now worth about £7 billion, but figures from the
Association of British Insurers (ABI) suggest that it could be worth £18
billion by 2012. Tom McPhail, of Hargreaves Lansdown, another IFA, believes
that the 2012 estimate could be on the conservative side. “The ABI figures
are from 2004,” he says. “If anything, the growth trend is accelerating
thanks to the decline of final-salary pension schemes. The whole question of
how people get money out of pensions is going to become more important.”
Conventional annuities are disliked not only because of poor interest rates,
which have fallen by about 15 per cent over the past five years, but also
because the entire pension fund goes to the life insurer when you die.
Moreover, longer lifespans have led to longer retirements, making capital
growth a necessary investment objective.
However, maintaining a secure income at the same time remains critical. A
recent Hartford Life study found that three quarters of respondents wanted a
guaranteed pension income with the potential for future growth and 55 per
cent said that they would be willing to consider such a plan for their
retirement income. The question now is which type of scheme will suit you
best.
The Hartford plan is effectively an invested annuity. The maximum age of
investment is 70 and the minimum contribution is £10,000, although your fund
must be worth £50,000 before you can start to withdraw income. Investors can
choose from 85 funds, which include big names such as Fidelity and Jupiter.
The plan returns a guaranteed income dependent on age. For example, a
65-year-old will start off by receiving 5.5 per cent, but this level of
income can rise. If the underlying fund performs very well, investors can
lock in growth in the form of higher guaranteed income payments. However,
the level of income will not fall. If the plan underperforms, the insurer
will cover the original guaranteed income. When the term of the investment
plan ends, the money can be rolled over into an Asp, or it can be used to
buy a conventional annuity.
Investment advisers believe that Hartford Platinum has strong appeal, but they
urge caution. “The lock-in system makes it attractive,” Mr McPhail says.
“But the cost of the guarantees and the overall cost of the plan mean that
you are unlikely to see much in the way of investment growth.”
Fees are relatively high, running to about 2.5 per cent a year, once
underlying fund management charges and the plan management charge have been
taken into account. However, Mr Thraves argues that the Hartford plan’s
charges are not excessive. “If you want those sorts of guarantees and
flexibility, you are going to have to pay for it,” he says.
Mr McPhail prefers the Living Time option. “It is more straightforward,” he
says, “and the only real risk is a movement in annuity rates.”
At present, Living Time’s rates are competitive. A 65-year-old man investing a
pension fund of £100,000 would receive an income of £6,418 a year for ten
years from the Living Time 75 Plan, which is more than £320 more per annum
than the income paid for life by the largest traditional annuity providers.
Rates aside, the attraction of this type of plan is that it is not for life.
Kim Lerche-Thomsen, of Living Time, says: “It gives clients the flexibility
to rethink their finances during retirement and pick a new income product
that suits their situation later on.”
The outlook for those who dislike the idea of purchasing a conventional
annuity is good. “The over60s are politically and financially influential –
and there are more and more of them,” Mr Thraves says.
CASE STUDY: Decision day delayed
David Cheek, a marketing consultant and fundraiser for the Isle of Wight
Hospice, and his wife, Sue, a teacher of the Alexander technique, had
planned to stop working when David reached 60, but when that happened last
year, they had a change of heart.
“We found that Sue was really enjoying her work, I was really enjoying mine
and we didn’t want to stop working,” Mr Cheek says. “If we had purchased a
traditional annuity, we would have had to decide what sort we needed – not
only for now but for the next 40 years.”
The Cheeks were advised by Gillian Cardy, of Professional Partnerships, the
IFA, to opt for a Living Time plan. Mr Cheek says: “This fitted, very
neatly, what we were after, which was basically not to have to make a
decision right now. We can draw a bit of income and keep the balance to
invest. And if we pop our clogs, there will be something to leave to our
kids.”
At the moment, the Cheeks are planning to work until they reach 65 and then
reassess the situation.
