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  • June 1999 Themed supervisory visits PIA unsure whether Adequate explanation of risks PFW advice complied with PIA rules Those advising had sufficient awareness and understanding Emphasised importance of Keeping adequate records Clear explanation of risks to client Undertaking CPD
  • Client: Married, good-health, no dependant children Contingencies: Should I buy? Guarantee? 5 or 10? Escalation? How long will I live? Spouse’s Pensions? Which of us will go first?
  • Longevity Between 2002 and 2005 alone, life expectancy increased from 78.0 to 78.4 Gilt Yields Gilt yields are highly correlated with market interest rates Why? Interest rates fall, fixed interest securities such as gilts become more attractive, driving their price up and therefore their running yield down. Where are interest rates going fro here? IoD predicted w/c 12/10/09 – would reamin flat for two years and then rise gradually….
  • Throughout the rest of the presentation, we will be dipping in to the FSA’s small firms extranet for commentary in the relevant areas. The first of these is on the next page………
  • What essential information must I know about the customer if I'm to give them suitable advice for unsecured pensions using income withdrawal or the purchase of short term annuities? The customer's personal and financial circumstances should be considered carefully, in particular: the customer's investment objectives current and future income requirements, existing pension assets and the relative importance of the plan, given the customer's financial circumstances attitude to risk, ensuring that any difference between their attitude to risk relating to unsecured pension arrangements, and that in relation to other investments is clearly
  • Identifying risk Ascertaining a private customer's true attitude to risk is critical for any adviser in assessing suitability and making an investment recommendation. Risk should be explained in terms that a particular customer can understand. Customers with less experience or knowledge of investments will need a detailed and clear explanation of inherent risk with recommendations being made. Individual customers may have different appetites for risk at different times in their life, dependent on the circumstances and their investment objectives. Firms may have ongoing relationships with customers where they will review a customer's portfolio of investments on a periodic basis and will need to be mindful of the fact that the customer's risk appetite may change over time. In explaining why a recommendation is suitable, for example in a suitability letter, the adviser will normally make reference to why a recommendation is consistent with the customer's attitude to risk and the customer's understanding of risk. Ensuring such understanding will enable firms to make appropriate recommendations, improving the quality of advice and reduce the risk of future complaints. This information will act as a reminder of some of the key points and responsibilities that an adviser will need to consider when recommending investments. Do you use a risk profile on your standard fact find with a scale
  • Do you use a risk profiling/asset allocation tool supplied by a third party provider? We do not approve or endorse such tools but some firms do find them useful, if used correctly. Some of these tools aim to assist advisers in helping the customer visualise the level of investment risk they are prepared to accept for each of their investment objectives. The conduct of business rules require firms to ensure customers understand risk - some firms find the use of such tools helpful in meeting that requirement. Where firms are using these tools, they should ensure this is adequately recorded on the customer file. However, even where such tools are used, firms should be mindful of the fact that it remains their responsibility to ensure their customers achieve the appropriate level of understanding
  • Throughout the rest of the presentation, we will be dipping in to the FSA’s small firms extranet for commentary in the relevant areas. The first of these is on the next page………
  • Throughout the rest of the presentation, we will be dipping in to the FSA’s small firms extranet for commentary in the relevant areas. The first of these is on the next page………
  • So what should I take into account when advising a customer on alternatively secured pensions? The FSA requires authorised firms and advisers to keep up to date about potential changes in the law. You must have regard to, and give appropriate warnings about, material risks that might have an adverse effect on a client if the client takes, or refrains from taking, your advice. Anyone being recommended to enter into an ASP should have the potential tax consequences explained clearly to them by their adviser. They should also be told the Government might remove access to ASPs altogether if evidence is found of continued use to provide capital sums after age 75. Are there concerns about unsecured pensions? An unsecured pension, using income withdrawal or using short term annuities, is complex and is not suitable for everyone. It is riskier than an annuity as the income received is not guaranteed and will vary depending on the value and performance of underlying assets. Advisers must make sure their customers are aware of the risks unsecured pensions. The customer is exposed to similar risks if the unsecured pension uses short term annuities. This is also true for alternatively secured pensions. The followings risks identified for unsecured pensions will also apply for alternatively secured pensions.
  • PENSIONS
  • Zurich

    1. 1. Suitable Retirement Solutions New Model Adviser Conference 14 th /15 th January 2010 Nick Cooper Pensions Proposition Manager Zurich Assurance Limited For intermediary use only – not for use with your clients
    2. 2. Agenda <ul><li>Size and demographics </li></ul><ul><li>Regulatory issues </li></ul><ul><li>Annuity: known / unknowns </li></ul><ul><li>Unsecured Pensions </li></ul><ul><li>A third way? </li></ul><ul><li>Alternative Secured Pension (ASP) </li></ul>
    3. 3. Size and Demographics
    4. 4. Big market, getting bigger Product providers and financial advisers will be presented with considerable opportunities from the ‘at-retirement’ market in the next five years, Watson Wyatt predicts. UK ‘at-retirement’ market for financial products will grow by over 60% to £23.1bn during the next five years. Increasing number of people coming up to retirement in the next five years to ten years and in spite of poor investment markets. Source: Professional Adviser July 2009
    5. 5. Regulatory issues
    6. 6. RU55: Core Knowledge (August 1998) <ul><li>IFAs should </li></ul><ul><li>Understand structure of annuities </li></ul><ul><ul><li>Be aware of mortality, underlying investments, cost of options </li></ul></ul><ul><ul><li>Be aware of financial strength issues </li></ul></ul><ul><ul><li>Be aware of annuity types </li></ul></ul><ul><li>On PFW (Drawdown) </li></ul><ul><ul><li>Be able to calculate min and max GAD </li></ul></ul><ul><ul><li>Understand the need for adviser led annual reviews </li></ul></ul><ul><ul><li>Understand death benefits </li></ul></ul><ul><ul><li>Understand the concept of Phased inc. with Drawdown </li></ul></ul><ul><ul><ul><li>Advantages and disadvantages </li></ul></ul></ul><ul><ul><li>Understand value of SIPP and effect of charges / commission </li></ul></ul>
    7. 7. RU55: Core Knowledge (August 1998) <ul><li>IFAs should </li></ul><ul><li>Investment considerations </li></ul><ul><ul><li>Understand need to match investments to needs </li></ul></ul><ul><ul><li>Be aware of structure of different types of funds </li></ul></ul><ul><ul><li>Understand Critical Yields and Mortality Drag </li></ul></ul><ul><ul><li>Be aware of client’s wider investments </li></ul></ul>
    8. 8. RU67: Records needed (June 1999) <ul><li>Investment objectives; need for PCLS; state of health </li></ul><ul><li>Income requirements; existing pension assets </li></ul><ul><li>Relative importance of plan by reference to financial circumstances </li></ul><ul><li>ATR (some instances of inconsistencies with assets noted) </li></ul>PIA wishes firms to be in no doubt that failure to comply with record keeping Rules may, in itself, give rise to disciplinary action
    9. 9. Annuity: Known Unknowns
    10. 10. Lifetime Annuity Advantages: Knowns <ul><li>Known income </li></ul><ul><li>Known, or inflation-linked, increases </li></ul><ul><li>Known spouses pension / death benefits </li></ul><ul><li>Payable throughout (joint) lifetime(s) </li></ul><ul><li>Safe/ secure </li></ul><ul><li>No investment risk (unless specifically investment-linked) </li></ul><ul><li>BUT….. </li></ul><ul><li>40% of 55-64 year olds find buying an annuity unacceptable </li></ul><ul><ul><li>Source: Marketing Sciences Ltd. – February 2007 </li></ul></ul>
    11. 11. Lifetime Annuity Options Source: http://www.fsa.gov.uk/tables/bespoke/Annuities as at 1st October 2009. Non-smoker. Best rate. £5640 £7368 £11256 £12540 £12564 Yearly amount . payable m.i.a. 55.1% 41.4% 10.4% 0.2% Contingencies “ Cost” Single life pension, guaranteed 5 years, RPI increases Joint-life pension with 2/3rds WDAR , guaranteed 5 years, RPI increases Joint-life pension with 2/3rds WDAR , guaranteed 5 years, non-increasing Single life pension, non-guaranteed, non-increasing Single Life pension, 5 year guarantee , non-increasing PP=£200,000, Male 60, Spouse 3YY Lifetime annuity basis
    12. 13. Impaired or Enhanced Annuity? <ul><li>Up to xx% improvement </li></ul><ul><ul><li>Dependant upon condition </li></ul></ul><ul><li>50% of those ineligible at 60, become eligible by 75 </li></ul><ul><ul><li>Significant if choosing USP </li></ul></ul>Source: http://www.fsa.gov.uk/tables/bespoke/Annuities as at 1st October 2009. Best rate Impaired Annuity £14364 £12564 Annual amount payable m.i.a. 14% Improvement Single life pension, non-guaranteed, non-increasing Single Life pension, Smoker , non-increasing PP=£200,000, Male 60, Spouse 3YY Lifetime annuity basis
    13. 14. Unsecured Pension: an attractive option for many?
    14. 15. Suitability – Income Withdrawal <ul><ul><li>Ability to take TFC but no income </li></ul></ul><ul><ul><li>Client younger & alternative annuity less attractive </li></ul></ul><ul><ul><li>Investment term long enough for taking on the investment risk & reward </li></ul></ul><ul><ul><li>Client is not dependent on income </li></ul></ul><ul><ul><li>Needs / wants flexible income </li></ul></ul><ul><ul><li>Believes annuity rates will rise </li></ul></ul><ul><ul><li>Ill health </li></ul></ul><ul><ul><ul><li>Expects health deterioration to enable impaired lifetime annuity?!! </li></ul></ul></ul><ul><ul><ul><li>Care re CTO/IHT position on death in first 2 years </li></ul></ul></ul><ul><ul><li>Maximise death benefits (needs analysis/clarification) </li></ul></ul><ul><ul><li>Sophisticated client who understands risk </li></ul></ul><ul><ul><li>Has Investments outside pension arrangement & therefore diversification / sophistication </li></ul></ul><ul><ul><li>Fund large enough to absorb administration cost </li></ul></ul>
    15. 16. Small Firms web-pages from FSA <ul><li>What essential information must I know? </li></ul><ul><li>The customer's personal and financial circumstances should be considered carefully, in particular: </li></ul><ul><ul><li>the customer's investment objectives </li></ul></ul><ul><ul><li>current and future income requirements </li></ul></ul><ul><ul><ul><li>existing pension assets </li></ul></ul></ul><ul><ul><ul><li>relative importance of the plan, given the customer's financial circumstances </li></ul></ul></ul><ul><ul><li>attitude to risk </li></ul></ul><ul><ul><ul><li>ensuring that any difference between their attitude to risk PFW vs other investments explained </li></ul></ul></ul>
    16. 17. Small Firms web pages from FSA: Identifying Risk <ul><li>Ascertain ATR </li></ul><ul><ul><li>Critical for in assessing suitability and making an investment recommendation. </li></ul></ul><ul><li>Explain in terms that a particular customer can understand </li></ul><ul><ul><li>Customers with less experience or knowledge of investments </li></ul></ul><ul><ul><ul><li>need a detailed and clear explanation of inherent risk with recommendations being made </li></ul></ul></ul><ul><li>Individual customers may have different appetites for risk at different times in their life </li></ul><ul><ul><li>need to be mindful of the fact that the customer's risk appetite may change over time </li></ul></ul>
    17. 18. Small Firms web-pages from FSA: Asset Allocation Tools <ul><li>CoB Rules require firms to ensure customers understand risk </li></ul><ul><ul><li>Some firms find the use of such tools helpful </li></ul></ul><ul><ul><li>Ensure use is adequately recorded on the customer file </li></ul></ul><ul><ul><ul><li>Remember, it remains your responsibility to ensure customers have appropriate level of understanding </li></ul></ul></ul><ul><li>Can assist advisers in helping the customer visualise the level of investment risk they are prepared to accept </li></ul><ul><li>By way of policy, FSA do not approve or endorse such tools </li></ul>
    18. 19. FSA Small Firms web-site: Unsecured Pension - Short Term Annuity <ul><li>Part of USP can be used to buy a short term annuity </li></ul><ul><li>To qualify as a short term annuity it: </li></ul><ul><ul><li>can run no longer than five years </li></ul></ul><ul><ul><li>must not extend past the member's 75th birthday </li></ul></ul><ul><ul><li>must be paid at least annually </li></ul></ul><ul><ul><li>Income can vary in the same way as a lifetime annuity </li></ul></ul><ul><li>A short term annuity may be guaranteed for full term </li></ul><ul><ul><li>member dies after 12 months => income continues for 4 years </li></ul></ul><ul><li>Capital guarantees are not permitted </li></ul><ul><li>It is possible to take a USP by a mixture </li></ul><ul><ul><li>Drawdown and short term annuities </li></ul></ul><ul><li>The member can also buy further short term annuities whilst still receiving income from an existing one </li></ul>Source: FSA Small Firms website
    19. 20. Advantages / Disadvantages <ul><li>Not committing whole fund </li></ul><ul><li>Can wait for lifetime annuity rates to improve </li></ul><ul><ul><li>or health to deteriorate! </li></ul></ul><ul><li>Not locked in to decision long term </li></ul><ul><li>Can mix and match </li></ul><ul><li>Can protect excess over purchase price on death </li></ul><ul><li>Builds in expense at each purchase </li></ul><ul><li>Relatively complex </li></ul><ul><li>Small market-place </li></ul>
    20. 21. Isn’t there another way?
    21. 22. “ Third Way” Guarantee Benefits Income, Death, Capital Investment Choice % Growth Locked in Frequency of Lock in Cost of Guarantees’
    22. 23. Advantages / Disadvantages <ul><li>Guarantees </li></ul><ul><li>Take potential pain out of investment? </li></ul><ul><li>Offer annuity alternative to cautious investor? </li></ul><ul><li>Expensive </li></ul><ul><li>Complex </li></ul><ul><li>Poorly understood </li></ul><ul><li>Cautious portfolio vs CY </li></ul>
    23. 24. Third way (a guaranteed income) <ul><li>In addition to wrapper, what about income, fund and advice charges…. </li></ul><ul><li>Guaranteed level of income to someone aged 65 is 3.8% </li></ul><ul><ul><li>Example, only £2,850 a year whereas could have purchased 30—40% more </li></ul></ul><ul><li>Every 3 years the fund is reviewed - income will increase by same amount </li></ul><ul><ul><li>E.g. Fund ^ 20% income ^ 20% </li></ul></ul><ul><ul><li>If Fund falls in the three years, income doesn’t fall </li></ul></ul><ul><li>As income is taken out each year, the fund falls in value </li></ul><ul><ul><li>Growth has to replace INCOME first </li></ul></ul><ul><ul><li>Growth would also need to replace the charges too – high at 2.1% </li></ul></ul><ul><li>2.1% each year + 3.8% (income) + Commission costs (say 0.5%) </li></ul><ul><li>8% a year growth would match best CPA in 6.5 years </li></ul><ul><li>BUT 8% is not really 8% </li></ul><ul><ul><li>it’s 14.4% ( inc. commission, income and AMC) </li></ul></ul><ul><li>For a cautious investor? </li></ul><ul><ul><li>In a Cautious (Index-tracking) Portfolio? </li></ul></ul><ul><ul><ul><li>If not, Suitability must capture investment strategy mis-match </li></ul></ul></ul><ul><ul><li>With the limited fund ranges available? </li></ul></ul>
    24. 25. Alternative Secured Pension
    25. 26. Small Firms web-page from FSA <ul><li>Factors when advising a customer on alternatively secured pensions? </li></ul><ul><li>Firms and advisers to keep up to date about potential changes in the law </li></ul><ul><li>Regard to & warnings for Risks where adverse effect on a client </li></ul><ul><ul><li>Whether taking your advice or refraining! </li></ul></ul><ul><li>Anyone recommended ASP should have the potential tax consequences explained </li></ul><ul><ul><li>Should also be told the Government might remove access to ASPs altogether </li></ul></ul><ul><ul><li>If evidence is found of continued use to provide capital sums after age 75 </li></ul></ul>
    26. 27. Summary <ul><li>ATR driven advice </li></ul><ul><li>All options considered </li></ul><ul><ul><li>Annuity </li></ul></ul><ul><ul><li>USP (Income Withdrawal or Temp Annuity) </li></ul></ul><ul><ul><li>Third Way </li></ul></ul><ul><ul><li>Phased Retirement </li></ul></ul><ul><li>Risks explained and covered in Suitability Report </li></ul><ul><li>Portfolio construction is key </li></ul><ul><li>Funds and cost important </li></ul>
    27. 28. Thank you for listening The tax and legislation information contained in this document is based on Zurich Intermediary Group current understanding as at November 2009 and may change in the future. HM Revenue and Customs (HMRC) practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The value of any investment and the income from it can fall as well as rise as a result of market and currency fluctuations and your client may not get back the amount originally invested. Zurich Intermediary Group Limited authorised and regulated by the Financial Services Authority. Registered in England and Wales under company number 01909111 Registered Office: UK Life Centre, Station Road, Swindon SN1 1EL. Telephone no. 0500 546 546. We may monitor or record calls to improve service. For use by professional financial advisers only. No other person should rely on, or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use with clients. Important information 2009z 938 (Expiry – 30/4/2010)

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