Bankhall Conference 2009 - Partnership


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The Retirement Review

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  • Size of the markets – predicted by Watson Wyatt.
  • Read slide
  • Some of the options are not that new, so some clients may have been in USP or phased for some time!
  • ..and as they get older, with non-crystallised benefits, the more likely they are to qualify for an enhanced or impaired life annuity.
  • USP / Phasing – there are a number of things to consider when these cases are reviewed – it’s not just about critical yields and GAD rates – many other personal circumstances should be considered.State Pension / other benefitsInflationFailing health (client or partner)Death of a spouse / dependantLong-term care (client or partner)Moving homeFamily responsibilitiesLegislative changesInheritance
  • So, there will be cases where the fund value has dropped. When Lucy took out her USP, she was looking to target an income of £15,000 in the future. But since the fund has dropped, what could she purchase?
  • Now, depending on the client circumstances, adviser and client will make a decision. Drawdown looks attractive but is that the best choice for a smoker? Is the max GAD sustainable? Value guarantee can also be build into the annuity so that the death benefit is ‘drawdown like’.If you were offered a job for £24,500 but the income was variable – so could go up and down....or you were offered an identical job with an income of £24,000...which would you take? Some would be happy to take the chance...others not prepared!
  • In this case the enhanced annuity would provide the highest level of income.
  • It’s rather like buying a standard rate annuity from a fund of £241, 518! - i.e. A fund that has suddenly grown by over 20%
  • Read
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  • By deferring Bob is better off each year. BUT it will take 12 years to recover the £6,888 he has not received at 65! Timing is very important here.
  • But he still wants to retain death benefits.
  • Comparison between USP and Value Protected annuity death benefits in first year, ignoring fund growth on USP. USP death benefit is subject to fund fluctuation and amount of future income taken, VPA benefit decreases by the annuity payments taken.
  • If the income isn’t required immediately and the client is under age 75 there is nothing stopping him making a personal pension contribution with part or all of the income. Taxed payable on annuity, but tax relief on at least £3,600 pa into pp (more if earnings support this). Builds up new fund with 100% ROF death benefits and entitlement to PCLS. Or client can pay into someone else’s arrangement – perhaps a spouse without an LTA issue.
  • ..and here’s why
  • Diagram showing the concept of phasing. First years ‘income’ is largely actually PCLS – so no tax to pay on this part, small amount of annuity – but as annuity purchased each year, progressively less PCLS needed to make up the difference in target ‘income’
  • But what happens if the client contracts a serious illness part way through phasing? Are you considering the open market option each time? What about enhanced / impaired rates? What difference does it make?
  • Read through scenario
  • These figures based on spreadsheet using best annuity rates from exchange 10/09. Assumes starting value of fund was £150,000, but £6,000 pa taken as combination of PCLS and annuity and residual fund continues to grow at 6% pa. You can see that £13,437 has to be crystallised to produce the desired ‘income’ in year 4. ‘Segments’ is in inverted commas, because technically plan does not need to be segmented but most still are for ease of admin.
  • If enhanced rates are used (Partnership 10/09) each ‘segment’ is worth more in terms of income, therefore less has to be crystallised in any given year. No huge effect in this one year – but still ‘material’ and client is better off in terms of retaining more in the PPP for return of fund. However, the next year,there is a lower ‘gap’ to fund because of this year’s higher annuity – and there is a higher annuity next year since enhanced rates will apply again. Over time, therefore, there is a significant cumulative effect.
  • If standard rates used throughout the fund value remaining uncrystallised is £89,749 assuming 6% growth rate, whereas this is £99,254 if using enhanced. Yet the same net ‘income’ has been received each year.
  • If the client had qualified for enhanced from outset, the difference in retained uncrystallised funds is as shown.
  • ..and we could offer some ‘money back’ on the crystallised monies as well of the client opts for Value protection.
  • So, whether a client is at or in retirement – 3 simple questions will start you on your way to ascertaining whether the client could make use of this opportunity.
  • Bankhall Conference 2009 - Partnership

    1. 1. Martin Lines<br />Retirement Technical Manager<br />The Retirement Review<br />Bankhall<br />November 2009<br />
    2. 2. The Retirement Review<br />
    3. 3. Agenda<br />Minority Report?<br />The Retirement Review<br />Phased by the options?<br />
    4. 4. Agenda<br />Minority Report?<br />The Retirement Review<br />Phased by the options?<br />
    5. 5. Market size<br />USP<br />£1.7bn<br />Impaired Annuity<br />£1.9bn<br />Variable £0.4bn’<br />Investment-linked’ <br />£1.2bn<br />Annuity<br />£14.7bn<br />Watson Wyatt In Retirement Study – predictions for 2009<br />
    6. 6. Treating Customers Fairly<br />TCF outcome 4:<br />“Where consumers receive advice, the advice is suitable and takes account of their circumstances”.<br />Estimated % of individuals who could benefit from enhanced / impaired annuities?<br />40%<br />
    7. 7. IFA Experience<br />&quot;Retirement Solutions are able to achieve over 45% qualification for enhanced annuities from our clients because we assume that they will qualify and that we question and probe to identify whether this is the case”.<br />Mick Bradley, Retirement solutions Ltd, a member of Bankhall. <br />
    8. 8. Agenda<br />Minority Report?<br />The Retirement Review<br />Phased by the options?<br />
    9. 9. Ageing ‘retired’ population!<br />Income Drawdown / USP is 14 years old!<br />Personal Pension Phasing is 21 years old!<br />
    10. 10. Many are already ‘in’ retirement!<br /><ul><li>Dark blue and ‘blank’ are potential Partnership clients.
    11. 11. What strategy do you have in place to ensure your business supports these people’s needs?</li></ul>Source: National Statistics Online. By Age, April 2001, England and Wales<br />
    12. 12. Client Reviews <br />Long-term care<br />Inflation<br />Inheritance<br />Product development<br />Fund Performance<br />Health<br />Moving home<br />Family responsibilities<br />State Pension<br />Marital Status<br />Legislation<br />Changes to GAD rates<br />Critical Yield<br />
    13. 13. USP – example 1 - Lucy <br />Lucy commenced USP at age 52<br />Initial Fund value £230,000<br />Current fund value is £200,000<br />Lucy suffers from a serious illness<br />Lucy is a smoker<br />Has non-pension income producing assets<br />Looking to maximise income from pension<br />*Mycosis Fungoides<br />
    14. 14. Playing your cards right?<br />* Source: 29 August 2009 ** The Exchange. Partnership rate. 3 September 2009<br />*** Source: 3 September 2009. All figures are for illustration purposes only. <br />
    15. 15. Enhanced Annuity Case Study<br />An enhanced Annuity via Partnership would provide:<br />£14,752 <br />per annum<br /><ul><li>Fig with Value Protection?</li></ul>Partnership enhanced rate 3/9/09<br />
    16. 16. Put another way...<br />This is the equivalent of uplifting Lucy’s USP fund from £200,000 to...<br />£241,518<br />An extra £41,518!<br />How long would it take for 20% fund growth while taking an income?<br />
    17. 17. Example 2 - Bob<br />Bob, aged 65 is a smoker<br />In May 2006, he took full PCLS from his pension<br />He did not need an income<br />He has a USP arrangement worth £100,000<br />His annual review is about to take place<br />
    18. 18. Should Bob continue to defer or take an income?<br />Markets start to recover lost ground<br />Interest rates or bond yields go up giving better annuity rates<br />How long will this take?<br />How much annuity income will your client lose?<br />
    19. 19. Impact of deferring - £100,000 fund value <br />Fund Value at 65 £100,000<br />Annuity available £6,888 pa<br />Projected fund at 66 £106,000<br />Annuity available £7,512<br />BUT would take 12 years to recover ‘lost’ income!<br />Based on:<br />A male smoker <br />£100,000 fund after tax-free cash with 100% ‘Value Protection’<br />Partnership Enhanced Annuity rates as at 30th September 2009<br />
    20. 20. But what about death benefits?<br />Bob in USP to take advantage of death benefits<br />Now wants highest ‘sustainable’ guaranteed income for life<br />But can he retain death benefits?<br />
    21. 21. Look Familiar? Lump sum death benefits year 1<br />Value Protected Enhanced Annuity<br />USP<br />£100,000<br />£100,000<br />£100,000 - £6,800* less 35% tax<br />= £60,580<br />£100,000 - £6,888 less 35% tax<br />= £60,522<br />*based on 100% GAD rate 14/8/09<br />
    22. 22. Use of income stream<br />Value Protected Annuity<br />65% death benefit (less payments received)<br />Personal Pension Plan<br />For 3rd Party<br />Personal Pension Plan<br />100% death benefit<br />25% PCLS<br />
    23. 23. Agenda<br />Minority Report?<br />The Retirement Review<br />Phased by the options?<br />
    24. 24. Example - Phased<br />Objective - to leave as much money ‘uncrystallised’ as possible whilst still receiving a targeted income.<br />Maximise net income from ‘segments’ used<br />Retain death benefits on ‘uncrystallised’ funds<br />
    25. 25. Tax efficiency<br />PCLS<br />Annuity<br />More reliance on annuity as client gets older<br />Tax may be subject to change in the future and depends on individual circumstances.<br />
    26. 26. Tax efficiency<br />PCLS<br />Annuity<br />More reliance on annuity as client gets older<br />Tax may be subject to change in the future and depends on individual circumstances.<br />
    27. 27. Example<br />Frank starts phasing benefits into annuities from age 60<br />He targets an income of £6,000<br />On the 4th annual review, it transpires that the client has contracted serious illness. <br />By year 4 he still has an uncrystallised fund of £117,008 <br />Maintaining level of income still important<br />Wants to maximise death benefits<br />Could now qualify for enhanced annuity<br />Based on an initial fund value of £150,000 growth rate 6% on uncrystallised funds<br />
    28. 28. Example – year 4 (age 63)<br /> Client needs approximately £6,000 pa<br /> Value of ‘segments’ crystallised £13,437<br />New ‘income’<br />required <br />£3,359<br />PCLS<br />Standard annuity rate 6.7%<br />£540 net<br />Existing <br />income<br />£2,100 net<br /> £5,999<br />Annuity shown net of 20% tax<br />Based on an initial fund value of £150,000 growth rate 6% on uncrystallised funds<br />
    29. 29. Example – year 4 (age 63)<br /> Client needs approximately £6,000 pa<br /> Value of ‘segments’ crystallised £12,926<br />New ‘income’<br />required <br />£3,231<br />PCLS<br />Because Frank qualifies for a higher annuity rate, an additional £511 remains ‘uncrystallised’ <br />£668 net<br />Existing <br />income<br />£2,100 net<br /> £5,999<br />Annuity shown net of 20% tax<br />Based on an initial fund value of £150,000 growth rate 6% on uncrystallised funds<br />
    30. 30. The cumulative effect from year 4<br />Uncrystallised fund at age 70 using standard rates from year 4<br />£89,749<br />Uncrystallised fund at age 70 using enhanced rates from year 4<br />£99,254<br />Based on an initial fund value of £150,000 growth rate 6% on uncrystallised funds<br />
    31. 31. If he qualified from outset..<br />Uncrystallised fund at age 70 using standard rates from year 4<br />£89,749<br />Uncrystallised fund at age 70 using enhanced rates from outset<br />£110,462<br />Based on an initial fund value of £150,000 growth rate 6% on uncrystallised funds<br />
    32. 32. Why use enhanced annuity with phasing<br />More income available from each ‘segment’<br />Fewer segments crystallised<br />Retains more of 100% ROF<br />Could opt for value protection allows for 65% ROF on new ‘crystallised’ funds<br />
    33. 33. The two minute change to your process - ‘At’ or ‘In’ retirement<br />Simply ask your clients three questions:<br /><ul><li>Do you smoke?
    34. 34. Are you currently taking prescribed medicine?
    35. 35. Have you ever been hospitalised due to a serious medical condition?</li></li></ul><li>IFA Experience<br />&quot; The common quotation form really helps and enables us to provide higher income to our clients and higher income to ourselves, an opportunity to maximise our income whilst being compliant and observing TCF - a win - win situation”.<br />Mick Bradley, Retirement solutions Ltd.<br />
    36. 36. Thank you<br />Name: Martin Lines<br /> Retirement Technical Manager<br />Partnership is a trading style of The Partnership Group of Companies, which includes: Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261), and Partnership Home Loans Limited (registered in England and Wales No. 05108846). <br />Both companies are authorised and regulated by the Financial Services Authority. The registered office for both companies is Sackville House, 143-149 Fenchurch Street, London EC3M 6BN.<br />