New annuities combine security and flexibility
Retirees can now combine the security of a guaranteed income with the flexibility offered by income drawdown following the launch of two new plans from retirement specialists Retirement Advantage and Partnership.
The plans aim to make it easier for middle-income retirees to take advantage of the opportunities ushered in by April’s pension reforms by combining an annuity and an investment account in one plan.
The Retirement Account, launched by Retirement Advantage, incorporates income drawdown, a cash account and a guaranteed annuity income and seeks to offer retirees the ultimate in flexibility. Income can be stopped or started at any point or can be adjusted as retirees’ needs change.
Cash for ad hoc expenses can also be accessed from the cash account or drawdown pot and because some money remains invested, retirees have the potential to carry on growing their savings. Moreover, by keeping money within the pension wrapper, customers will find it easier to pass on their wealth and will enjoy the tax benefits offered (which includes protection from inheritance tax and income tax if they die before age 75).
The policy also includes a range of investment funds selected by independent investment consultants Square Mile and includes active and passive funds with a choice of cautious, balanced and aggressive risk strategies.
The cost of investing ranges between 0.41% and 0.7% depending on the funds selected.
Chris Evans, group chief executive at Retirement Advantage, said: “We think this product will mark the beginning of the end of the traditional annuity. Due to the way the account is structured, you are able to stop and start income at any point, as well as better control how death benefits are paid.”
He added: “Our research continues to show that people want the security of a guaranteed income, the ability to withdraw ad hoc lump sums, the opportunity to grow the value of investments and leave a legacy, all within a product which minimises tax.”
The Enhanced Retirement Account from Partnership, also combines an annuity with a cash account and an investment platform. However unlike the Retirement Advantage account it is only available to those retirees with medical problems or lifestyle factors (such as smoking or being overweight) that would make them eligible for an enhanced annuity.
It offers access to a range of funds from Vanguard Asset Management with costs ranging from 0.43% to 0.59%.
Andrew Megson, managing director of Retirement at Partnership, said: “In the past, people often had to choose between flexibility, tax-efficiency, security and growth. The ERA looks to combine these key features in an easy to manage product which can evolve with the needs of each customer.”
Although both plans strive to help retirees manage their retirement finances in a simple and straightforward manner, their complexity means they are only available from independent financial advisers, meaning retirees will also have to factor in the cost of advice.
Patrick Connolly, a chartered financial adviser at IFA Chase De Vere, said: “It really is positive to see companies such as Partnership and Retirement Advantage at the forefront of innovation as they aim to offer products with attractive benefits, flexibility and competitive costs.”
“We will see more products being launched, which will provide more choice for customers and also potentially see costs reduced further as competition amongst providers heats up.”
However he added that it was entirely appropriate that these plans should only be accessed via financial advisers.
“With such important decisions to make, in terms of making sure your pension will provide and income for the rest of your life, it has become even more important that people take financial advice.”
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.