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Skandia retirement income tip on nov 2012.pdf
 

Skandia retirement income tip on nov 2012.pdf

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This New Model Adviser® supplement, in partnership with Skandia, will investigate a wide range of issues affecting the retirement income market, offering technical guidance to help independent ...

This New Model Adviser® supplement, in partnership with Skandia, will investigate a wide range of issues affecting the retirement income market, offering technical guidance to help independent financial advisers. It will look at recent developments in the annuity market; opportunities in the retirement income market for advisers; and how they are using the wide range of options available.

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    Skandia retirement income tip on nov 2012.pdf Skandia retirement income tip on nov 2012.pdf Document Transcript

    • November 2012 Retirement income £ Innovations in the search for value £ £ £ £This marketing document is for the use of In association withprofessional clients exclusively and shouldnot be relied upon by any third party
    • The new Skandia Generation FundsIt’s a big question that many clients are asking, and it’s one ofthe reasons why we’ve launched the new Generation Funds, arange of four multi-manager, multi-asset funds with the aim of generating a total investment return ahead of inflation, over a rolling investment period out of which the Funds target an annual income yield.If you have clients that are asking how they can make theirretirement fund go further, the new Generation Funds could bea bold answer. For more, visit skandiainvestmentgroup.com*These stated aims are not guaranteed but targets.For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance. The value of investmentscan go down as well as up, and investors may not get back the amount invested. Calls may be monitored and recorded for training purposes and to avoidmisunderstandings. Skandia Investment Group is a trading name of Skandia Investment Management Limited. Skandia Investment Management Limited isauthorised and regulated by the Financial Services Authority, FSA Registered Number 208543. Registered in England and Wales. Registered Number: 4227837.Registered office: Skandia House, Portland Terrace, Southampton, SO14 7EJ. The Authorised Corporate Director for the Skandia Generation Funds is SkandiaInvestment Management Limited. OMGI 10/12/0107
    • November 2012 citywire.co.uk/adviser 3 Retirement income Contents 4 Chapter 1: Fixed-term annuities MetLife exits fixed-term annuities, but other providers continue innovating £ £ £ 8 Chapter 2: Income drawdown£ Income drawdown clients have suffered, but advisers believe flexible drawdown is helping £ 12 Chapter 3: Q&A John Ventre, head of multi-manager at Skandia Investment Group, suggests solutions for sustaining income into retirement without eroding capital
    • 4 citywire.co.uk/adviser November 2012Retirement incomeChapter 1 Fixed-termsomething image: annuities remain a to represent fitting niche market (yawn!) into a niche
    • November 2012 citywire.co.uk/adviser 5 Retirement incomeMetLife exits fixed-term annuities but otherproviders continue innovatingIain MartinT he decision of MetLife to exit the fixed-term The remaining fixed-term annuity providers, Aviva, annuity market has led some advisers to Just Retirement and LV=, were innovating rather than question the value of these flexible retirement retreating from the market, he says. Burrows pointsincome products. Fixed-term annuities undoubtedly to Just Retirement’s new break clause, which allowshave a role to play in retirement planning, but clients to switch product at any point, and Primetimemany IFAs and clients are opting for the control Retirement’s Sipp-based fixed-term annuity.offered by drawdown over a short-term gamble on short term The other flexible annu providers may be keen annuityannuity rates. to write new business, but Ian Smith of Central business The departure of MetLife from the rom Financial Plannin feels that clients are wary Planningfixed-term annuity market was as when the proprovider of their product leavesa strategic move rather than a the market ‘Even though the business market.signal of broader problems for or is passed on to someone else, itflexible annuities, according too is really ddisturbing for the client,’Billy Burrows, director at Better ter says Smith. says SmRetirement Group. Fixed-term annuities offer Fixed ‘MetLife did not choose to enter flexibility, but the uncertainty over flexibilitythe fixed-term annuity [market], et], future retirement income means retrather they acquired a fixed-term erm these products are only suitable pannuity business through the purchase for clients with higherof AIG, and in effect Living Time,’ says me,’ tolerance for risk,Burrows. ‘So they have probably chosen ably explains Smith. Heto stick to what they do best, which adds that incomeis unit-linked guarantees.’ drawdown may be a more attractive option for many clients. ‘WeBilly Burrows: ‘It is have either ended updifficult to forecast with clients who do notwhere annuity rates have the risk appetiteare going’ and need an annuity, or
    • 6 citywire.co.uk/adviser November 2012Retirement incomethey do and therefore they need drawdown.’ annuities are still a useful planning tool for clients who Advisers need to ensure that only those clients with live uncertain lives, says Childs.other sources of income and the capacity to take risk ‘The future is uncertain for all of us but for someover their eventual retirement income buy fixed-term people it is particularly uncertain – where theirannuities, says Burrows. The risk is thrown into sharp marriages are not good or where someone has lostrelief when you consider that annuity rates have their wife but may remarry,’ says Childs. ‘Whereplunged in some casesby more than 30% in thelast 10 years. ‘You may be better off keeping your options open ‘It is difficult toforecast where annuity because who knows what will happen in terms ofrates are going. People interest rates’ Kim Lerche-Thomsen, Primetime Retirementincreasingly agree thatinterest rates will behigher some time in the future but when that it is we people have been married for 40 years and will bedon’t know,’ says Burrows. ‘They are taking a gamble together for the rest of their lives, the case for aon annuity rates but also leaving the possibility of short-term annuity is less obvious.’benefiting from an enhanced annuity.’ Advisers also use fixed-term annuities with the Annuity rates will recover at some point over knowledge or expec expectation that clients will bein the future when interest rates and est eligible for an enhanced annuity at a later enhinvestment returns rise while advances date, says Burrows. The fact enhanced Burroin life expectancy level out, says Arthur annuity rates have significantly higher rates haChilds, managing director of Arch Financial or than the average lifetime annuity may averagPlanning. ‘You have this huge risk that help offset the risk that annuity rates fall rannuity rates have been going down for even further.decades, and there is no major reason o ‘Regretfully for all of us, our health iswhy they should turn aroundound going to deteriorate as we get older, and deteriodramatically,’ he says. you may be better off keeping b ‘Generally, people your options open because oare best advised to who knows what happens inbuy a lifetime annuity terms of interest rates, or ternow rather thangamble on the factthey might be higher Ian Smith:in five years’ time.’ ‘The clients we target Fixed-term have other assets’
    • November 2012 citywire.co.uk/adviser 7 Retirement incomeyour personal life,’ says Kim Lerche-Thomsen, chief protection so you getexecutive of Primetime Retirement. the full fund back less Smith feels that even where the client is likely to the income.’become eligible for an enhanced annuity, drawdown Smith argues thatcould be a more suitable option. ‘The clients we drawdown offers moretarget have other assets, so this is not the only control, flexibility andsource of income we have to get,’ he says. superior death benefits for clients with the rightDeath benefits risk tolerance for a fixed-Advisers also complain that annuity providers have term annuity. Phasedfocused on maximising income when many clients annuitisation, where Arthur Childs:were more concerned about death benefits. Fixed- the client buys smaller ‘The future is lifetime annuities while in uncertain for all of us’ drawdown, appeals toThe fact enhanced Smith, who is also wary of concentrating risk with one provider.annuity rates have Drawdown investors are warned that this is a higher risk retirement option, but so many have been spookedsignificantly higher rates by falling Government Actuary’s Department (GAD)than the average lifetime rates, which limit the maximum withdrawal income, says Lerche-Thomsen. ‘With drawdown, you have theannuity may help offset potential double whammy of falling markets and GAD limits and a lot of drawdown customers have found thethe risk that annuity rates whole thing too scary,’ says Lerche-Thomsen.fall even further Fixed-term annuities may have fallen out of favour with some financial planners, but the related flexible annuities still offer options. For example,term annuity providers could offer more flexibility with Childs thinks that the terms of the Prudentialdeath benefits, says Lerche-Thomsen, adding that with-profits annuity are attractive for those clientsthe standard five-year guarantee lifetime annuities do who are willing to take some risk over their futurenot offer value to clients. retirement income. ‘The chances of you dying within five years of Advisers could also replicate the features ofretirement are very small. You have to be over 80 a fixed-term annuity with deposit accounts heldbefore your chance of dying is the same as zero through a Sipp, according to Burrows. ‘People cancoming up on a roulette wheel,’ he says. ‘We don’t do it themselves, but it is obviously more complex,’believe that is fair, so we only use products with value he says.
    • 8 citywire.co.uk/adviser November 2012Retirement incomeChapter 2 Drawdown clients face tough challenges
    • November 2012 citywire.co.uk/adviser 9 Retirement incomeIncome drawdown clients have suffered butadvisers believe flexible drawdown is helpingJennifer HillT imes are tough for those approaching many have suffered sharp drops in income. retirement: volatile investment markets have The maximum amount that can be taken from a knocked chunks of value off pension pots, drawdown fund is determined by rates set by thewhile historically low interest rates have depressed Government Actuary’s Department (GAD). Theseannuity rates. are linked to 15-year gilt yields, which have declined ‘It’s the perfect storm for pensions – the combined sharply following the Bank of England’s quantitativeeffect of five years of poor investment returns and easing programme.the lowest gilt yields in financial history,’ says Calum In July 2007, drawdown gilt yield peaked at 5.25% yieldsCameron, chief executive of Leicestershire-based – a figure that has since fallen to just 2%. Those who jusWillow Financial Management. went into drawdown before April 20 had to have 2011 Retirees who have opted their income levels reviewed every f years, meaning fiveto leave their pension pot that people who took out plans in 2007 could see their 2invested and draw an nvested income fall by up to 60% this year this year.income from it, instead ncome Dr Ros Altmann, a former pension adviser to the penof buying an annuity, government, says: ‘These pension savers did not penshave also felt the want to be locked into an annuity, which takes annupinch. Around 325,000 away any chance of capital growth, yetpensioners have put they now find they are being hit by thenearly £20 billion into falling rates an anyway. These cutscapped income mean somsomeone wanting thedrawdown and sam income as they same could have taken co Calum Cameron: ‘It’s the perfect storm for pensions’
    • 10 citywire.co.uk/adviser November 2012Retirement incomefrom a £100,000 pension fund three years ago would the pension was a property it would be like having nonow need a fund of more than £140,000.’ growth in the property price, but getting a steady 5% rental income,’ says Cameron.Managing risk ‘You can produce a very conservative incomeThe consensus is that gilt yields will remain low for portfolio paying 3.5% to 4% with a diversified rangesome time and investors could face lower investment of corporate bonds, global bonds and high-yieldreturns going forward. equities. If you want to get up to 5.5% or 6%, you ‘The days of double-digit returns are over,’ says have to take on a bit more risk, but it’s relativelyAlistair Creevy, managing director of Glasgow- straightforward to create an income yield in thebased Independent Advisers (Scotland). ‘The new portfolio that covers GAD drawdown rates just now.’environment is all about risk management.’ Managing risk is one of the biggest issues for Road to ruinclients thinking about going into drawdown or those One of the key dangers for income drawdownalready in a drawdown plan, according to Cameron. investors is ‘ruin’ – running out of money before you‘Within that discussion with clients, we talk government has taken steps to prevent die. The governabout the biggest danger: that the client ggest this, imposin the requirement for income imposingwill have a knee-jerk reaction and come nee-jerk reviews eve three years, not five, from April everyout at the worst time.’ orst 2011 and cutting the annual withdrawal limit c Heading for the exit when markets are or from 120% of the GAD rate to just 100%.tumbling only serves to crystallise losses. y ‘We’ve been managing capped drawdown bSimilarly, taking the maximum level of ng plans since 1995 [when drawdown becameincome and cashing in units in the fund an alternative to annuity purchase],’ saysto satisfy income requirements ome Mike Godfrey co-founder of Cube Financial Godfrey,runs down capital. apital. Planning, the Hampshire-based adviser. The optimal strategy al ‘It’s been an interesting time from an beeis to engineer the r investment perspective; there have been investmportfolio so that it hat good t times and awful times. You need acreates enough gh diverse and well-structured approach to diversincome to fundnd asset allocation.’ asset withdrawals, Those with a guaranteed retirement Thleaving the capital apital income of £20,000 a year or more – incomvalue untouched. hed. through the State pension and defined throu ‘We explain nthis to clients with s Mik Mike Godfrey: ‘You need a diversereference to a and well-structured approach torental property: if ty: asset allocation’ asse
    • November 2012 citywire.co.uk/adviser 11 Retirement incomeMaximum drawdown plummets Male – by age Female – by age 65 70 75 65 70 75 August 2009 £7,920 £9,000 £10,800 £7,440 £8,520 £9,960 August 2012 (GAD rate reduced to 2%) £5,300 £6,200 £7,700 £4,900 £5,800 £7,000 % change in maximum drawdown -33.1% -31.1% -28.7% -34.1% -31.9% -29.7% Increase in value of pension fund required £49,434 £45,161 £40,260 £51,837 £46,897 £42,286 to maintain August 2009 income Source: Centre for Economics and Business Researchbenefit schemes, for example – have been able to that this is the starting level of drawdown you shouldwithdraw more from defined contribution funds following use to make sure you never run out of money. It isthe introduction of flexible drawdown in April last year. too simplistic, as clients’ ages, for instance, have an ‘It creates more choice for people,’ says Godfrey. effect. An 85-year-old could take more.’‘If you’re going to encourage people to make Cameron believes the focus should firmly be onprovision for retirement, then it’s good to give them financial planning. ‘Some [clients] take the maximumflexibility and control, provided the Government can drawdown when they don’t need it and use the incomesatisfy itself that it’s asensible strategy. ‘Given that you have ‘These pension savers did not want to be lockedto have a fixed pension into an annuity, which takes away any chance ofof £20,000 to qualify[for flexible drawdown], capital growth, yet they now find they are beingthe Government has hit by falling rates anyway’ Ros Altmannmade sure that thesepeople won’t end upbeing dependent on the welfare state even if they do to fund pensions for their children, as this makes theexhaust their drawdown fund.’ money completely free of inheritance tax,’ he says. ‘I have another client who’s in ill health andFinancial planning focus wanted to withdraw the maximum. He went for anOne size does not fit all. Prudent advisers do not view aggressive portfolio and [through a combination ofa pension fund in isolation; they take into account lower GAD rates and poor investment markets] hisan individual client’s entire asset base and set of income has dropped by 20%. He knew that wascircumstances, including their age. the risk, but the first few years of retirement were Craig Burgess, managing director of Blackstone the most important to him. He’s already taken outWealth Management, says: ‘This is a well-trodden £20,000 more than he would have done by buyingpath for US advisers, who often use the 4% rule: an annuity.’
    • 12 citywire.co.uk/adviser November 2012Retirement incomeChapter 3Q and AJohn Ventre, head of multi-manager at SkandiaInvestment Group, suggests solutions forsustaining income into retirement withouteroding capitalWhat are the key issues that IFA clients feel did with Spectrum was to link the fund managementthey face when approaching retirement? targets, that is, the need to achieve the highest level of return for a given level of risk, with the investor’sWhen accumulating their retirement wealth, clients need to accumulate in a way that matched theirshould focus on avoiding one of the key investment capacity for loss. That way they could feel morerisks of buying high and selling low by building their comfortable remaining invested for the long term.portfolio in a way that matches their risk profile. However, the risks for people who need income It’s an approach we at Skandia Investment Group in retirement can be different from those who arehelped bring to market when we launched Spectrum accumulating their assets in a fund like Spectrum.and its method of volatility or risk targeting. What we Therefore, in the run up to retirement they need to
    • November 2012 citywire.co.uk/adviser 13 Retirement incomestart thinking abouthow they will draw thisincome. Do they opt ‘Whilst income has now become the driver,for the annuity route,or decide that income rather than accumulation, clients still needdrawdown (or both) is to manage the scale of capital erosion sincemore suitable for them? For those that they don’t know how long they will live’reject the guaranteedincome that comes withbuying an annuity, the question is one of how can I graded investment options and managedgenerate enough income to support me throughout packaged products that target a desiredmy retirement years. But whilst income has now retirement income.become the driver, rather than accumulation, clientsstill need to manage the scale of capital erosion If retirement wealth is like driving a fast car,since they don’t know how long they will live. what should people do that helps them drive safely as opposed to driving into a brick wall?What are the key concerns you have as aprovider when clients reach retirement? If the analogy for using their accumulated retirement wealth is like driving a car then I would adviseWe believe that when investors reach retirement people to drive it as though it were an expensivethere should be a greater focus on client outcomes. classic. By that I mean if you were to put a dent intoIssues such as longevity risk, inflation, interest rates it, then it could prove to be a very costly mistake.and mortality risk can have a big effect on retirement For those that don’t opt for the annuity model,income and sometimes this can be overlooked, one of the biggest threats to someone’s retirementespecially in drawdown. wealth is that it doesn’t last the distance, either The other key consideration is the need to because they have taken too much income, or thatconcentrate on income sustainability. Advisers market forces have depleted their capital. Therefore,should plan in regular reviews so that they can be it’s crucial that they manage the scale of capitalsure the client can sustain their level of income for erosion to avoid the risk of ruin.life, that they can monitor their income comfortzones, and assess what their expected bequest How are you helping advisers and clientsvalues may be when they die. overcome these issues? However, we also feel that providers can do alot more to help advisers with these issues. For I talked earlier about the need for providers toinstance developing a range of flexible, risk- develop a range of managed solutions that target a
    • 14 citywire.co.uk/adviser November 2012Retirement incomedesired retirement income. At Skandia Investment In the low gilt yield environment, how do yourGroup, we’ve just launched a new range of Funds help boost the client’s income?funds with a variety of benefits, such as a riskexpectation, a targeted level of income, and a way The Funds offer an attractive solution for manyof trying to manage the risk and scale of capital investors with differing income needs. Havingerosion through time. exposure to a globally diverse range of assets They are called the Generation Funds and enables the Funds to generate a natural yield.they consist of four multi-manager, multi-asset When necessary the Fund employs a covered callportfolios that aim to deliver a total investment investment strategy to achieve its target level ofreturn ahead of inflation, over a rolling investment income of either 4% or 6% a year.period, out of which the funds will target an The Funds also draw on the highly specialisedannual income yield. expertise of our in-house multi manager team Two of the funds – Target 3:4 and Target 3:6 – the same team responsible for the popular– aim to achieve CPI+ 3% over a rollingfive year average, ‘We’ve just launched a new range of fundsout of which theywill target an annual with a variety of benefits, such as a riskincome of 4% and 6%respectively. The other expectation, a targeted level of income,two funds – named and a way of trying to manage the risk andTarget 4:4 and Target4:6 – aim for CPI + 4% scale of capital erosion through time’over a rolling sevenyear average – withannual income targets of 4% and 6%, respectively. Skandia Spectrum Fund range. These include As you can see, we are again aiming to align manager research and selection; proven assetthe needs of customers with the objectives of the allocation skills; and the ability to access a widefund manager. For instance there will be people range of high-quality investment talent globally.that need a higher income – the 6% target – but Bearing all this in mind, we believe that, forfor whom leaving a lot of capital behind isn’t advisers, the Funds represent a fully outsourcedimportant. Therefore they may want to take solution that could form a core component ofrelatively less risk and go for the lower returning 3:6 many investors’ financial plans who are concernedoption. Others may have lower income needs and about how they should draw an income inwant to limit the scale of erosion of their capital, so retirement and manage the scale of capitalfor them the target 4:4 might be better. erosion.
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    • The new Skandia Generation FundsIt’s a big question that many clients are asking, and it’s one ofthe reasons why we’ve launched the new Generation Funds, arange of four multi-manager, multi-asset funds with the aim of generating a total investment return ahead of inflation, over a rolling investment period out of which the Funds target an annual income yield.If you have clients that are asking how they can make theirretirement fund go further, the new Generation Funds could bea bold answer. For more, visit skandiainvestmentgroup.com*These stated aims are not guaranteed but targets.For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance. The value of investmentscan go down as well as up, and investors may not get back the amount invested. Calls may be monitored and recorded for training purposes and to avoidmisunderstandings. Skandia Investment Group is a trading name of Skandia Investment Management Limited. Skandia Investment Management Limited isauthorised and regulated by the Financial Services Authority, FSA Registered Number 208543. Registered in England and Wales. Registered Number: 4227837.Registered office: Skandia House, Portland Terrace, Southampton, SO14 7EJ. The Authorised Corporate Director for the Skandia Generation Funds is SkandiaInvestment Management Limited. OMGI 10/12/0107