group's Calculator will help intermediaries sell drawdown products and prevent mis-selling
Skandia has designed a calculator to help intermediaries model how investment strategies adopted under drawdown would have performed.
The calculator illustrates the benefits of taking drawdown at a level equivalent to the income produced by the annuity the client would have otherwise received.
Peter Jordan, sales and marketing director at Skandia, said the calculator, available towards the end of April, was the first tool for brokers to calculate how various investment approaches would have fared under drawdown. It also provides a possible solution to misuse of drawdown funds. Capping the amount that can be drawn down to the level of annuity would help manage many of the problems associated with drawdown, he said, particularly the erosion of capital.
The Government has continued to criticise drawdown when defending its decision to maintain compulsion to buy an annuity at age 75.
Speaking at a committee looking at David Curry MP's annuity reform bill last week, Ruth Kelly, chief secretary to the Treasury, said: 'Drawdown involves taking a gamble on the stock market and the cost of advice is often as high as 6% of the nominal cost of the product. Delaying the purchase of an annuity makes it less efficient.'
Jordan added that the calculator should also enable advisers to counter some of the negative coverage of drawdown following criticism from the Government and in the press.
'The negative coverage of drawdown largely highlights what has gone wrong when people draw too much money too early,' Jordan said. 'This is not a problem with drawdown in itself but with how people use it.'
The calculator will show all the benefits available to investors at a given level of drawdown and how they would have performed in different portfolios. It states the overall fund value at the end of each year, the spouses pension available on death and the lump sum death benefit.
For example, a male client with £100,000 could receive an annuity of £8,129 on a joint life product guaranteed for five years or draw down an equivalent sum and invest it. The calculator can show how the remaining fund would continue to grow using different portfolio styles.
For a balanced portfolio, if the same client had taken income at the level of an annuity for the six years to 2002, he would have £102,892 and a lump sum death benefit worth £66,880, as well as a £7,243 spouse's death benefit.
With a more aggressively invested portfolio, with 50% invested in long bonds, 25% in Fidelity Special Situations, 13% in Invesco Perpetual Growth and 12% in the Henderson Global Tech fund, the benefits to the investor look better. After six years, the fund would be worth £133,500, a pension worth £9,398 would be available for the spouse and there would be a lump sum death benefit of £83,819.
Jordan said these figures provide a much broader picture than simply stating the fund value and enable advisers to show clients the importance of not drawing down too large a proportion of their fund.
'It will help explain a complex product to clients and how it should be used,' he said.
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