In financial services as in all major markets, social and demographic change drives innovation. The rise and rise of home ownership has transformed the mortgage market.
Changes in the composition of households led to the development of critical illness insurance, among other things. But today, it’s another aspect of social and demographic change which is driving particularly dynamic and significant innovation: increasing longevity.
This hugely important trend has already led to a lot of change in the retirement income market. But we think there are still more needs that aren’t yet being addressed. And that’s why we launched Life Trust to specialise not just in the retirement market, but specifically in the financial issues arising from increasing longevity – which isn’t the same thing at all.
Longer lives, greater uncertainty
You may have heard some statistics. Today, a man of 50 has a 45% chance of living to the age of 90, and a 10% chance of reaching 100. And lifespans are still getting longer – a leading academic calculates that life expectancy is increasing by five hours every day.
This raises some big issues. Longer life expectancy means more uncertainty about the length of life – and about the length of retirement. Are we looking for a solution that will last a client for 10 years, or for 40?
And to add uncertainty onto uncertainty, the timing and nature of retirement itself has become a much less clear-cut concept. What was a predictable event at age 65 is now often a gradual process that can last for decades.
Beyond the textbook solution
Of course the textbook solution to these uncertainties is the annuity, and we’ve seen a good deal of innovation in this market recently.
But annuities don’t solve all problems – least of all those decisions that arise about spending retirement capital. Take a man in his mid 70s well-known to the author of this piece (actually, it’s my father). The roof of his home isn’t in great shape. Should he take a bite out of his capital to fix it? If he lives another ten years, there’d be no problem. If he lived another 20 years – and if, say, the costs of care were heavy in the later years – he could live to regret eroding his capital.
Equally, he could regret holding onto his money to keep his options open. The long term trend for annuity rates has been downwards, with the growth in longevity outstripping fund growth. All else being equal, it’s likely that annuity rates for the healthy will continue to decline as longevity continues to rise. So holding onto cash to get a better rate could leave clients substantially worse off in the future, having missed out on considerable income in the meantime.
The new Longevity Income Plan
It was with exactly this kind of dilemma in mind that we designed the Longevity Income Plan – a lump sum investment designed to complement a client’s existing pension provision by paying a rising income for 20 years from age 75 or 80.
How does it work? It’s beautifully simple. Clients invest a small proportion of their total retirement savings at any time up to 10 years before the vesting date. (You advise on a choice of fund strategies and leading funds.) The investment rolls up offshore.
At age 75 or 80, the income stream starts to flow. And here’s the unique part: when Planholders die, the value of their original investment and the growth achieved is redistributed among the others. This effectively turbocharges the income over the years.
On a 7% growth assumption, a man investing just £15,000 at age 55 can expect an income of around £4,400 at age 80, rising to around £16,600 if he lives to be 95. His total return over the 20 years if he reaches 100 (and he has a one in 10 chance) is around £305,000.
And by the way, whenever he dies the amount payable to his estate will never be less that his original investment, less any income he has received at that time.
Meeting a wide variety of needs
We believe the Longevity Income Plan opens up new options for a whole range of clients who want to plan for a long and prosperous retirement. This could involve protecting the value of their estates; ensuring they can continue to lead independent lives; protecting against capital erosion; or helping fund other family commitments, like grandchildren’s education.
Ideas whose time has come
The figures make a compelling case for the Longevity Income Plan. To see what we mean, visit our website, www.lifetrust.com
Or you might then like to call us 0845 051 8351 to talk through some examples, and receive specific quotations with our compliments.
In today’s world of increasing longevity, with more and more of your clients living longer but increasingly unpredictable lives, we think you’ll agree that Life Trust, and our new Longevity Income Plan, are both ideas whose time has come.
