Guide to flexi-access drawdown illustrations

Transcription

1 For investment professionals only. Not to be relied upon by private investors. Guide to flexi-access drawdown illustrations The FundsNetwork Pension

2 We ve made enhancements to pension illustrations After listening to feedback from administrators, paraplanners and advisers, we have made a number of enhancements to illustrations for the FundsNetwork Pension. This guide gives a detailed explanation of flexi-access drawdown illustrations. These can be edited to show a different adviser s name FCA number and firm name can t be edited.

3 Normally the day you run the illustration. You can choose the date your client buys an annuity, all illustrations presume they eventually buy an annuity, as the Critical Yield doesn t work without this. Anything less than a year from today s date will prevent the Critical Yield from calculating properly. You can illustrate for a net or gross payment for the customer (employee). On our pension illustration system, you can illustrate for escalation in line with an index such as the Retail Pricing Index (RPI) however, this isn t a facility we currently offer in our pension, but is useful for comparisons. Fixed escalations (e.g. 1%) can be set up to increase once per year. All these figures are given fixed values within our illustration system as well, e.g. RPI=2.3% rather than RPI being a dynamic predictor of future inflation. The assumption is the standard LTA, currently 1,030,000. However, our pension illustration system is not sensitive to the value of the pension, and LTA limitations it will let you crystallise 2m and take 500k PCLS (PCLS is based on maximum 25%). You can add LTA protection and this will be populated on the illustration below the Standard LTA section. For different investment options we use different rates, which can change from time to time, and are currently: Equities 2% 5% 8% Bonds 0% 3% 6% Cash 1.4% 1.6% 4.6% When inflation at 2.5% is deducted from these we get: Equities -0.49% 2.44% 5.37% Bonds -2.44% 0.49% 3.41% Cash -3.80% -0.88% 2.05% This is consistent with COBS 13 Annex 2 Projections 2.3R. If you don t choose a withdrawal income, you won t get a Critical Yield B as this shows you the yield needed to maintain a target income.

4 These assumptions can be amended in our pension illustration system, if necessary. The annuity assumptions here are also used in working out Critical Yield A, and so the annuity you select will affect the Critical Yield required. These figures take into account inflation and are as at the client s Illustrative Annuity Purchase date. This section assumes a full crystallisation of the account at start date.

5 These figures take into account inflation. The final year corresponds with the client s Illustrative Annuity Purchase date. The amount of PCLS will only appear here if you illustrate to take PCLS upfront. If you illustrate for phased retirement (mix of PCLS and income) you will get extra columns here, showing nondrawdown funds, PCLS taken each year and total income (income + PCLS taken). Please note while we can illustrate for phased retirement we do not currently offer this facility in our pension.

6 The Investor fee ( 45 per year) is not included. The reason for this is that if the client has another sole account with FundsNetwork, the Investor fee will be taken from that instead of the pension it s a charge at client level and not specific to the client s pension. This may change in the future. Due to current low interest rates the minimum interest we pay on the account is more than we receive from banks.

7 These figures take into account inflation. For example, the figure for end of year 1 is calculated by working out the value at today s prices, e.g. for a 100,000 transfer (The calculation is / 1.025, and we always round down to 3 significant figures). Column 7 is equal to column 6 less any adviser charges. The Reduction in Yield is a measure of the effective charges on the plan.

8 Critical Yield A is the rate of return required for the account to maintain an income, at least equal to what the client would have had if they purchased an annuity at the time of the illustration, instead of using our pension. It s based on providing the same income that an annuity would have given at outset, and then maintaining that income for the rest of their life, by buying the same annuity that they selected at outset at a particular date, such as their 75th birthday. Critical Yield B relates to the level of income the client has selected, so is not included in this illustration. Where it is included, it s not directly comparable to Critical Yield A, as it is looking at the yield required to sustain a specific income for life. This assumes that underlying annuity rates are unchanged, but does take into account the fact that you are likely to get a better annuity rate as you get older. The annuity figure shown does not take into account inflation, although it is likely that choosing a level annuity inflation, would mean the real value of income is lower. The annuity interest rate referred to is not the actual annuity rate that that your client would get, but the assumed increase in the amount of income they would get from an annuity, if they purchased it a year later with the same amount of money.

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10 Glossary Nominal terms Real terms Retained interest Figures before inflation are taken into account, e.g. 100 grows at 5% pa, so in a year s time is worth 105. Taking into account inflation and giving an indication of what could be purchased today, e.g. sandwiches today cost 5, so the 100 above can be used to buy 20. If inflation is 2% in a year s time, sandwiches will cost So with your 105 to spend on sandwiches, you can still only afford 20 (but you do have some change now). Effectively your 105 next year buys you what 103 would buy you today. Research has shown that people struggle to take into account inflation when thinking about the future, they see 105 and think wow that s 21 sandwiches and I can only buy 20 right now. This is one of the reasons we are required to put figures in real terms, it gives people a better feel of the lifestyle they are likely to be able to afford. Where we receive more interest from the money held, than we pass on to customers. We currently hold money in a mix of instant access and term accounts, which means we do earn some interest. If this ever exceeds what we pay in interest on cash, we have to declare this here. It is calculated as a blended rate, so if we have 100 in cash we might have roughly 80 available in instant access paying 0% and 20 in a term account paying 1%. This would mean our blended rate is 0.2%, as the amount of cash we hold varies day-to-day, with money moving in and out of pension cash this figure will fluctuate accordingly. We will always declare the maximum interest we could be retaining. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. FundsNetwork TM and its logo are trademarks of FIL Limited. UKM0418/21902/SSO/0419