The retirement income market has changed dramatically in recent years, bringing new challenges for pensioners and their advisers.
Today’s pensioners tend to be more active than previous generations and often need more money to fund their lifestyle as they move into retirement. Due to increased life expectancy, and the subsequent increased likelihood of having to pay for care, it is more important than ever for those approaching retirement to make the right decisions in order to get the most income from their pension. Advisers will know that the choices their clients make for transforming pension funds to income in retirement are among the most important financial decisions they will have to make.
The arrival of flexible retirement income products – those which sit as a compromise somewhere between old-style annuities and drawdown options – into the UK has created a new market. These products have for some time been commonplace in the US and Japan, where savers have been able to keep their funds invested until 75 and beyond without the risks inherent in drawdown and without the inflexibility of traditional annuities. Now providers such as Lincoln, MetLife, Hartford and Aegon are entering the UK market with products developed specifically for advisers and their clients.
These products, often dubbed the “third way” or “middle way”, provide innovative solutions for people planning their income in retirement. They offer flexibility with a level of guarantee which is proving to meet the needs of many clients disillusioned with traditional annuities. “Third way” products enable those in the early years of retirement to keep control for a longer period without the risks of the money running out, as in conventional income drawdown.
One of the most important elements of these new products is the guarantee they offer. However, it is worth noting that the way they function does vary from one provider to another.
Some guarantees will ‘lock-in’ investment returns, meaning that the returns paid by the product will never drop below a certain pre-determined level, while others will guarantee the interest rate applied to the pension pot or fund. Often products will offer a combination of the two. Lincoln i2Live features a guarantee option which, while it is activated, guarantees 75% of what is calculated as the ‘maximum supportable income’, i.e. the yearly income that the fund could support throughout life. This guaranteed level of income is reviewed on a five-yearly basis, so it can grow in line with the pension pot, to ensure that the guarantee remains a valuable feature and a highly effective safety net.
Although the flexibility and level of guarantee is very attractive, one of the obstacles facing consumers when exploring Third Way products is a lack of understanding. The industry has work to do in explaining these products clearly and making the connection between annuities and protection against market losses with added upside potential, and the subsequent guaranteed income stream. As the market for flexible annuity products is still relatively young in the UK, it is not surprising that there is an information barrier to overcome.
Research* by Lincoln Retirement Income revealed that, while the vast majority of financial advisers are confident that their clients will consider US-style annuities, around 46% of them felt that the biggest weakness these products faced was their complexity.
As the way these products function varies to some extent from provider to provider, it is vital that the industry, both advisers and providers, makes a concerted effort to explain the benefits and value of such products, particularly the guarantee options, in helping clients prepare for a comfortable retirement.
Fitting with the ethos of flexible annuity products, Lincoln’s guarantee option is just that: flexible. Giving the customer control over his or her retirement package is key, so Lincoln’s guarantee can be turned on and off on an annual basis. Choice is, and has to be, at the heart of the future of retirement planning.
The UK retirement savings market is evolving rapidly, and there is a real need for innovative solutions to enable customers to plan for their futures. Traditional annuities do not offer the flexibility and choice required by clients facing retirement today and while there is still some way to go before advisers feel entirely happy with the term ‘flexible annuity’, it is only a matter of time before these new products are accepted as a viable alternative.
Lincoln Retirement Income launched Lincoln i2Live, its flexible retirement plan, in May 2007.
- Lincoln i2Live offers three products under one umbrella and allows clients to accumulate a retirement income pot with a range of flexible options on taking an income in retirement. Crucially the flexible income opportunities do not end at 75. Lincoln i2Live takes clients and their dependants through retirement.
- i2Live Drawdown is an unsecured pension plan providing flexible income up to age 75. Clients can then convert to i2Live Annuity. The fund is available on death to provide a choice of death benefits to suit dependant’s circumstances.
- i2Live Annuity is a flexible annuity offering income flexibility for life. It offers income on death to dependants through the joint life option or through the dependant’s guarantee period option. Customers can maximise income if no death benefits are required.
- i2Live offers a unique Income Guarantee Option, guaranteeing 75% of ‘maximum supportable income’ reviewed on a five-yearly basis.
For more information or to arrange a meeting with a Lincoln Business Development Manager, please call 0845 642 22 22 or visit www.lincoln-ifa.co.uk
* Independent financial adviser (IFA) interviews were conducted by George Street Research in March 2007. A total of 107 interviews were completed amongst a cross-section of advisers throughout Great Britain. Quotas were imposed on the total sample in respect of size of IFA firms, region and areas of specialisation.
