Prudential has launched an innovative pension annuity product which IFAs say substantially changes t...
Prudential has launched an innovative pension annuity product which IFAs say substantially changes the annuities market and the concept of what retirement income should be.
Although quite complex in nature, the Flexible Lifetime Annuity (FLA) from Prudential Annuities - the Pru's retirement income arm - addresses the perceived weaknesses of traditional annuities by controlling the income and investments through a mixed strategy of equities, corporate bonds and with-profits funds, and includes a guaranteed annuity under the Flexible Retirement Income Account.
This is the first time consumers have been able to invest in the stock market through an annuity, yet this is a truly flexible product as clients can make decisions about their annuity strategy at any time, and have the option of converting the value of their fund to a conventional fixed annuity.
Physical details of the Flexible Lifetime Annuity
Under the new product, annuitants with a pension of between £100,000 and £300,000 can use an element of simplified income drawdown within the annuity, adopt a cautious, managed or adventurous investment strategy which alters according to age, receive lifetime bonuses each month as extra units as well as recalculate their level of income and strategy every three years.
Investors can choose if they prefer to self-manage their investment from three M&G fund, Prudential's unitised with-profit fund and 10 funds managed by Perpetual, Newton, Phillips & Drew, Schroder and Merrill Lynch.
Available to the public through IFAs from 9 April, maximum income will be adjusted by Prudential every three years in line with actual and projected investment performance and longevity, and clients have the option of switching between lifetime strategies and self-management at any time. Up to six free fund switches are allowed each year and up to 50% of the total fund can be invested in with-profits at the outset.
Minimum investment is £100,000 between the ages of 50 and 75, with annuitants any level of income between 100% to 50% of the maximum income calculated by Prudential.
There is no bid/offer spread, initial charge is 3% with an annual management charge of between 0.8% and 1.225%, depending on the funds selected. Front-end commission is 2% with 0.25% trail fee, and switching out of FLA into guaranteed or unitised carries a 1% initial fee. IFAs can negotiate higher or lower initial and/or trail commission, subject to a maxima 4% initial and 0.5% trail to give commission adjustments to unit allocations on a 1:1 basis.
At the outset, up to 80% of the fund may also be "ringfenced" to providing continuing income to beneficiaries should death occur within the first 10 years, and income will be paid from ringfenced assets. If this pool is exhausted, income will be paid from lifetime investments.
Peter Quinton, managing director of leading IFA specialists Annuity Direct, says annuity products can take up to a year to develop, so the revolution of this product means it may be some time before other providers catch up.
David Marlow at the Annuity Bureau, adds:
"This new Flexible Lifetime Annuity from Prudential is a truly ground breaking product, which pushes the boundaries of what constitutes an annuity further than ever before. Given the current level of interest in annuities, the timing of the launch is perfect.
"Prudential is to be commended for coming up with something truly different which will extend retirees' choice and, in many instances, increase their income."
According to Quinton, split of the funds changes according to age, and should only be used by annuitants who have an adventurous outlook on investments.
For a male aged 50, using the managed strategy: up to 70% of assets can be placed in equities, with the remainder placed in corporate bonds and/or with-profits. The equity is reduced over time, so should he reach 75, more investment will be placed in corporate bonds and with-profits. At around the age of 84, says Quinton, the investment moves into a guaranteed annuity rate and with-profits.
On a cautious strategy, only 50% may be placed in equities, with 40% in with profits and 10% in corporate bonds. Again, the equity decreases over time and money is moved into corporate bonds, with a guaranteed rate at the end.
When it comes to the adventurous strategy, all monies are placed in equities from the start, however, at 61, the policy moves into with-profits.
For more information about the new product, contact Prudential Annuities on 0845 60 60 630.
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