PENSION FREEDOM ENDLESS POSSIBILITIES

Transcription

1 PENSION FREEDOM ENDLESS POSSIBILITIES A guide to our At Retirement tool Pensions THIS IS FOR FINANCIAL ADVISER USE ONLY AND SHOULDN T BE RELIED UPON BY ANY OTHER PERSON.

2 THE CHANGING FACE OF RETIREMENT Retirement has changed fundamentally, giving your clients more choice and control over how they take their retirement benefits than ever before. This will make deciding what to do with their retirement savings more complicated. Your clients are going to need your help to make the right choices as they approach retirement. Our At Retirement tool will help you establish what income your client needs in retirement and demonstrate the options available to meet their needs. CONTENTS Benefits for you and your clients 3 Getting started 4 How the tool works 5 Retirement modeller 8 Professional client report 15 2

3 BENEFITS FOR YOU AND YOUR CLIENTS Life expectancy You can understand how long your client is likely to live for, giving you both a date to plan around. Preference for certainty Get an idea of how important certainty of income is to your client, helping you to find the right solution to meet their needs. Income requirements Help your client understand what their minimum and aspirational levels of income are. Other income You can take into account other sources of income, e.g. state pension, employment and pensions either in payment now, or starting in the future. Professional client reports An unbranded and editable report that will help you demonstrate the work you ve done and the expertise you re providing to your client. It gives you the flexibility to make changes and help ensure that it meets your compliance requirements. Flexibility You can use as much or as little of the tool as you want to suit the needs of you and your client. Client data is stored, meaning that you don t need to re-enter details each time you use the tool. Some things to consider This tool is based on a number of assumptions. Things could work out differently to what we have shown. Taxation All withdrawal and income amounts are given gross of income tax. Annuities The tool assumes a standard single life Royal London annuity, escalating in line with RPI and with a 5 year guarantee, but the basis can be changed within the modeller. It doesn t take into account any guaranteed annuity rates. Health and lifestyle No account is taken of any health and lifestyle factors. You ll need to consider this when discussing options with your client. Investment We assume the same growth rate is achieved each year. The default rate is 5% p.a. but this can be changed within the modeller. This tool should not be considered as Royal London providing a recommendation or giving advice. We won t be held responsible for any advice or recommendations made on the back of this tool. 3

4 GETTING STARTED You can access the tool by logging into our online service at adviser.royallondon.com and launching the At Retirement Tool. To start looking at a new client, you should enter their details via Add client. You only need to enter a few key pieces of information. You only need to do this once and they ll be saved to your Client list. You ll then be able to select their name from your Client list and this will take you straight to the Tools menu where you can access each of the modules. 4

5 HOW THE TOOL WORKS The tool is split into four modules. You can use some or all of the modules to suit the needs of you and your client. The modules allow you to: Understand how long your client is likely to live for. Get an idea of how important certainty of income is to your client. Help your client understand what their minimum and aspirational levels of income are. Take into account the state pension. 1. Life expectancy The first module is life expectancy. This is automatically calculated when you enter your client s details. It s calculated using data from the Office for National Statistics. The calculation is based on three pieces of information: Date of birth Gender Region they currently live The figure we use is the age we expect only 25% of people like your client to live to; we would expect the other 75% of people like your client to have passed away by this age. You should remember that this is just an estimate and your client s actual life expectancy could be different from the age shown. As it doesn t take into account any health or lifestyle factors, you ll need to discuss how appropriate the calculation is for any clients with any health issues or lifestyle factors that may impact their life expectancy. 5

6 2. Certainty of income We know that every client is different. Understanding their preference for certainty of income will help you recommend the best solution to meet their needs. This module will help you by asking seven simple questions which have been designed by A2Risk and tested with respondents by Yougov. The results will outline characteristics that describe your client s preference for certainty of income. There are two possible outcomes. Either your client s responses display a preference for certainty of income or they don t display a preference for certainty of income. You can then discuss this with your client to ensure that they agree with the outcome. 3. Required income The next module is when you start to include details of the income your client will need when they retire. You can also provide details of their aspirational required income. This will help your client understand the amount of income they ll need to give them the life they want rather than merely getting by on the minimum amount. The default for both of these inputs is to escalate in line with RPI however you can change this to escalate at a different % or to remain level. 6

7 4. Other sources of income The last module can be used to take into account other sources of income your client will receive. State pension The state pension information is calculated when you first enter your client s details and shows the state pension date and amount. This information: is calculated using your client s date of birth and gender assumes your client is entitled to the full state pension (i.e. assumes full NIC record and no SERPS or S2P). However, you can update the state pension amount to take into account information you have about your client s entitlement, or remove the state pension altogether. Income from employment If your client s still working, you can provide details of their employment income, including amount, how it increases over time, and when it s due to stop being paid. Pension in payment or due to be paid in the future If your client has any pensions already in payment or due to start in the future, you can provide details including the amount, how it increases over time, and when it s due to start and stop being paid. 7

8 RETIREMENT MODELLER You can use the retirement modeller to explore the most appropriate options for your client s needs. There are two models to choose from, depending on how important certainty of income is to your client. 1. Certainty of income is less important For clients who have less of a need for certainty, there are flexible income scenarios. 2. Certainty of income is important For clients who have a need for certainty, there are options including guaranteed income. The outcomes are based on the information and assumptions you input, as a result, things could work out differently. 8

9 For clients who have less of a need for certainty, there are 4 flexible income scenarios that you can illustrate: Scenario 1: When will my fund run out if I take a specified amount per year? Scenario 3: What s the growth rate I need to take a specified income amount so that my fund doesn t run out before a given age? Scenario 2: What s the maximum income I can take so that my fund doesn t run out before a given age? Scenario 4: What size of fund do I need to take a specified income amount so that my fund doesn t run out before a given age? We ve set some defaults that you can change if you want to: Income starts at the chosen retirement age Income is paid monthly Income escalates in line with RPI (2.5% p.a.) Investment growth rate 5% p.a. Provider charge 1% p.a. Adviser charge zero 9

10 Case study Mary has a chosen retirement age of 65 and a fund value of 280,000. From entering her details, you ve established that she has a life expectancy of 92 and doesn t have a preference for certainty. You want to look at flexible income options. Scenario 1 When will Mary s fund run out if she takes an income of 15,000 p.a.? 1. Inputs have been kept as defaults. 2. Mary s fund will run out at age You can show Mary the income she ll receive but also how her fund will vary over time. You can also demonstrate the impact of different growth rates on the date the fund will run out. 10

11 Scenario 2 What s the maximum income Mary can take so that her fund doesn t run out before her life expectancy of age 92? 1. Mary wants to take 25% tax-free cash upfront. She also wants to take 12,000 p.a. each September from 2021 to 2024, increasing each year in line with RPI. 2. She can take a maximum of 7,693 p.a. so that her fund doesn t run out before age You can also show Mary the impact of varying: Target age Growth rate Growth rate and income 11

12 Scenario 3 Mary has an aspirational required income of 18,000 p.a. What s the growth rate Mary needs to take this income and ensure that her fund doesn t run out before age 95? 1. Mary doesn t want to take any tax-free cash but does want to take a one off withdrawal of 20,000 in November Mary also has a state pension and she wants to use this to help meet her aspirational required income. 3. A growth rate of 2% p.a. would be needed for Mary to meet her aspirational required income of 18,000 p.a. 12

13 Scenario 4 If Mary delays taking her income until she s 67, what size of fund does she need to take 15,000 p.a. so that her fund doesn t run out before age 90? 1. Mary wants to take 10% tax-free cash upfront and you want to assume a growth rate of 4.5%, rather than the default of 5%. 2. Mary would need a fund of 342,882 to take an upfront payment of 34,288 and an income of 15,000 p.a. 13

14 Certainty of income is important If the preference for certainty questions highlight that your client has a preference for certainty of income, then you might want to include guaranteed income when looking at their options. Let s look at Mary s options if certainty of income was important to her. Mary s minimum required level of income is 10,000 p.a. and her aspirational level of income is 15,000 p.a. As certainty of income is important to Mary, her minimum required income will be met by a combination of a guaranteed income, which is currently payable and payable for life e.g state pension, an annuity and tax-free cash. Tax-free cash can either be taken as a lump sum upfront or spread as an income. Here we ve spread this as an income. Any remaining fund will be used to provide a flexible income. 55.1% of her fund will be used to provide her minimum income, with the remaining 44.9% used to provide her with a flexible income. Annuity assumptions When looking at options including guaranteed income, you need to be aware that: We ve assumed a standard single life Royal London annuity, escalating in line with RPI and with a 5 year guarantee. It doesn t take into account any health or lifestyle factors for your client, so doesn t look at any other types of annuity that your client may qualify for e.g. enhanced or impaired annuity. If you want to change any of these assumptions, you can do this on the annuity page. You can either change the basis of the Royal London annuity, or enter your own annuity information (based on rates you can get elsewhere.) 14

15 cannot be changed. Plan value Life expectancy Retail Prices Index Retail Prices Index PROFESSIONAL CLIENT REPORT It s important that you can give your client a professional report that will help you demonstrate the work you ve done and the expertise you re providing. Our tool gives you an editable and unbranded report that gives you the flexibility to make changes and help ensure that it meets your compliance requirements. YOUR RETIREMENT INCOME OPTIONS TEMPLATE FOR YOUR CLIENT'S RETIREMENT INCOME OPTIONS Completed By: A Sample of For: Newco Date Produced: 27 March 2015 Assessing suitability There are a number of options available to you when you take your benefits from your retirement savings. Using information gathered on your immediate and future income needs, this report has been created to illustrate some of the options available to you. It's important we work together to determine which option is the most appropriate for you. The purpose of this report is to: Assist you in clarifying your retirement income needs. Show your potential life expectancy. Help clarify your preference and need for income certainty. Help you determine the income level you would wish now and in the future. Help you understand the options available. Help you understand the benefits and risks associated with these retirement options. You can find more information on retirement options at royallondon.com/retirementoptions All figures shown are for illustrative purposes and are not guaranteed. They are based on a number of assumptions about what could happen in the future and things could work out differently. 1 YOUR DETAILS Name: Example Case Sex: Female Date of birth: 12 November 1950 Region: UK Chosen retirement age: 65 This template is designed to help you complete your suitability report for your client. You should ensure that this template is fully completed with information specific to your client and meets your own compliance requirements before issuing a copy to your client. Disclaimer 5 YOUR REQUIRED INCOME Let's explore the level of income you are likely to need in your retirement. How much income might you need for an acceptable standard of living? You've indicated that you would need to receive a minimum yearly income of 10,000.00, increasing each year in line with the Retail Prices Index, during your retirement. How much do you need for an aspirational standard of living? 4 YOUR PREFERENCE FOR CERTAINTY By understanding your preference for income certainty I can begin to identify the retirement product option best suited to your needs. The more certainty you require, the more your preferences indicate a need for a guaranteed level of income. I've assessed your preference for income certainty based on your responses to the following statements: Statement Your response I would rather have a higher income at the start of my retirement, which may fall later, Agree than a lower income which is guaranteed for my whole life I would rather have access to my pension pot when I want during my retirement than Strongly agree take a regular income which is agreed at the start of my retirement You've indicated that you would like to receive a yearly income of 15,000.00, increasing each year in line with the Retail Prices Index, during your retirement. 6 YOUR OTHER SOURCES OF INCOME State pension In my retirement, I would prefer to take a higher income, with the risk that my pension pot runs out before I pass away, to a lower income which will be paid for as long as I live I don't think I would regret taking the chance of a higher income when I retire, even if I ended up with a lower income later in my retirement When thinking about my retirement income, I can accept changes to my income that depend on the ups and downs in financial markets I don't feel the need to leave any of my pension savings for others to inherit when I pass away In my retirement, I would prefer a predetermined (i.e. agreed in advance) amount each month, even if that means I have no control over further access to my pension pot Your responses to the statements suggest you don't have a preference for income certainty. 2 YOUR RETIREMENT SAVINGS Your fund value is 280,000. This value is for illustrative purposes only at this stage. Your fund value may go down as well as up between now and when you take your retirement savings. The suggested options for retirement income are based on your client's responses to the completed questions and the information provided. The resultant output is based on our own analysis and may differ from those provided by other companies. The report should not be considered as Royal London providing a recommendation or giving advice. Royal London will not be held responsible for any advice or recommendations made on the back of these results. Illustration requirements 7 SCENARIOS EXPLORED TO PROVIDE INCOME OPTIONS I've included the following state pension amount in this report: A yearly amount of 6,029, increasing each year in line with the Retail Prices Index, starting on 6 July 2011 and paid for the rest of your life. I've assumed a standard State Pension will be payable to you based on your age and gender. The amount shown assumes that you are entitled to the full basic State Pension and this amount may be higher or lower than your actual State Pension entitlement. More information, including how to get an estimate of your State Pension based on your National Insurance record, can be found at No strong opinion Agree Strongly agree Disagree Disagree Such an investor may have either a balance between certainty and flexibility or may seek flexibility. Compared to the average person, such an investor may be able to accept a retirement income that could fluctuate and may not last their entire lifetime. They may prefer to access their pension pot for large expenditure items like a new car or to have control over further access to their pension pot. They may also wish to leave a bequest to others. If you don't feel this describes you reasonably well let me know. 3 LIFE EXPECTANCY It's important that you understand how long you are likely to live to ensure that you have sufficient savings to maintain the level of income you need in retirement. Using your gender, age and region we can estimate your current life expectancy is This is the age we expect 25% of people like you will live to and is based on data from the Office for National Statistics. This is just an estimate and doesn't take into account any health conditions. Your actual longevity could be different from the age shown. This report must be issued alongside all other relevant material used as part of your advice process. Illustrations must still be produced in the event of a new plan being taken out or where benefits are being taken from an existing Royal London plan. Should you require further information or a product illustration, you can contact your usual Royal London contact. For a new business illustration, you can contact our National Support Unit on , or them at nsu@royallondon.com. Alternatively you can produce an illustration using our Online Services. 8 YOUR OPTIONS INCLUDING GUARANTEED INCOME Using the information gathered and displayed I can now show you the income you could receive in retirement from your fund value. Please remember these figures are only examples and are not guaranteed. HOW COULD MY FLEXIBLE INCOME FUND CHANGE OVER TIME? This graph shows you how your flexible income fund could change over the time period assuming your income levels being taken remain as shown. Your fund has been split 55.10% for annuity and 44.90% for flexible income so that your minimum required income can be met from the annuity (and any tax free cash which has been spread to provide an income). Your fund of 280,000 could be used to provide: Annuity You could receive an up-front lump sum of 38,570 and 2,953 p.a., escalating in line with RPI, paid for life. A standard lifetime annuity from Royal London has been used to give you an idea of the level of guaranteed income you could get. There are many other types of annuity including enhanced annuities which could pay you a higher level of income due to certain medical conditions or your lifestyle. Annuity tax free cash spread as income You could use the lump sum of 38,570 to provide 1,017 p.a., escalating in line with RPI. This would cease by age There are retirement income products that offer flexibility in terms of the level of income that can be taken and when it is taken. These products allow you to withdraw a regular income while the rest of your retirement savings remain invested to provide potential investment growth. The income is not guaranteed and there is a risk that your income and remaining fund could go down and you could run out of money. An annuity is a product where you can use some or all of your retirement savings to buy a guaranteed income for the rest of your life. Buying an annuity is a one-off decision that will set your income throughout your retirement and Within this report I have assumed a standard lifetime annuity from Royal London is purchased. There are different types of annuity available and if we agree an annuity forms all or part of your retirement income I will search the market to find the right product solution for you. There are enhanced annuities that could pay you a higher level of income due to certain medical conditions or your lifestyle. If you think this could apply to you please let me know. By combining flexible income options with an annuity, we can create a solution that provides you with some guaranteed income for life whilst giving you the flexibility of leaving some of your retirement savings invested and taking an additional income as and when you need it. You can usually take up to 25% of your retirement savings as tax free cash and use the remainder to buy a retirement income product. Taking tax free cash reduces the amount of savings you will have available to provide an income. Information and assumptions used to create scenario The following information and assumptions have been used to create this scenario: Chosen retirement age Your preference for certainty Your required income Your other sources of income MAKING CHANGES TO YOUR INVESTMENT GROWTH RATE Flexible income You could take 5,655 p.a., escalating in line with RPI, for your fund to run out by age WHAT IS THE IMPACT ON MY FLEXIBLE INCOME IF I CHANGE MY TARGET AGE? By changing your target age, the impact to your flexible income can be shown. Naturally the longer you require your Please note these figures don't take into account any tax you would have to pay. Other income than your to last entitlement for, the less to take yearly income your projected fund can provide. If we shorten your target age, your yearly tax free cash, any retirement benefits you receive will be liable for tax. Depending on the income other increases income you but have, there is a greater risk of you outliving your savings. taking retirement benefits may push you into a higher tax bracket meaning you'd pay more tax. Here you can see the amount of income that could be available under each income stream. Guaranteed income inputs Tax free cash %: 25.00% Using lump sum as income stream? Yes Income frequency: Monthly Annuity escalation rate: Your income will increase each year in line with the Spouse / civil partner annuity: 0.00% Guaranteed period: 5 years Flexible income inputs Age fund is to last until: 92.0 Tax free cash % to be taken up front as a lump sum: 0.00% Income frequency: Monthly Income escalation rate: Your income will increase each year in line with the Assumed investment growth rate: 5.0% p.a. Provider charge: 1.00% p.a. Initial adviser charge: 0.00% Ongoing adviser charge: 0.00% p.a. Amount to be left to your beneficiaries: 0.00 One off withdrawals included: No Under a plan providing flexible income, your remaining fund stays invested which means the value of your investment can go down as well as up. Assumed investment growth rates have been used however actual investment performance may differ from what we have assumed. WHAT IS THE IMPACT IF THE INVESTMENT GROWTH RATE CHANGES BUT I KEEP MY INCOME AT THE SAME LEVEL? By changing the assumed investment growth rates, but keeping your flexible income at the same amount, you can see the impact on how long your flexible fund could last for. 9 SUMMARY By assuming a lower investment growth rate, the length of time your fund can be used to provide income at the same level reduces. On the other hand, the higher the assumed investment growth rate, the longer the same level of income could potentially be paid. The lower your actual investment growth rate the quicker your fund could run out therefore it's really important we keep this under review. WHAT IS THE IMPACT ON MY INCOME LEVEL IF THE INVESTMENT GROWTH RATE CHANGES? By changing the assumed investment growth rates, and keeping the age your income is to be paid to the same, the impact on your flexible income amount can be shown. Put simply, if we assume a lower investment growth rate, the amount of income available is reduced. The higher the assumed investment growth rate, a greater level of flexible income could potentially be paid. This report highlights the information around your personal circumstances and income requirements that I've used to illustrate your income options in retirement that best match your retirement income objectives. Although the forecasts shown in this report are as accurate as possible, they're only an estimate and are not guaranteed. Your feedback will help create the most appropriate solution for you to meet your retirement needs. You should read this alongside other information I will make available to you, including specific product provider illustrations and product key features. APPENDIX - INCOME PROJECTION TABLE Here you can see the yearly income amounts that could be available under each income stream. Age State Pension Annuity Annuity tax Flexible Total Minimum Aspirational free cash income required income spread as income income 65 6,117 2,953 1,017 5,655 15,742 10,000 15, ,270 3,027 1,043 5,796 16,136 10,250 15, ,427 3,102 1,069 5,941 16,539 10,506 15, ,588 3,180 1,096 6,090 16,954 10,769 16, ,752 3,259 1,123 6,242 17,376 11,038 16, ,921 3,341 1,151 6,398 17,811 11,314 16, ,094 3,424 1,180 6,558 18,256 11,597 17, ,272 3,510 1,209 6,722 18,713 11,887 17, ,453 3,598 1,240 6,890 19,181 12,184 18, ,640 3,688 1,271 7,062 19,661 12,489 18, ,831 3,780 1,302 7,239 20,152 12,801 19, ,026 3,874 1,335 7,420 20,655 13,121 19, ,227 3,971 1,368 7,605 21,171 13,449 20, ,433 4,071 1,402 7,796 21,702 13,785 20, ,644 4,172 1,438 7,990 22,244 14,130 21, ,860 4,277 1,473 8,190 22,800 14,483 21, ,081 4,384 1,510 8,395 23,370 14,845 22, ,308 4,493 1,548 8,605 23,954 15,216 22, ,541 4,606 1,587 8,820 24,554 15,597 23, ,779 4,721 1,626 9,040 25,166 15,987 23, ,024 4,839 1,667 9,266 25,796 16,386 24, ,275 4,960 1,709 9,498 26,442 16,796 25, ,531 5,084 1,751 9,736 27,102 17,216 25, ,795 5,211 1,795 9,979 27,780 17,646 26, ,065 5,341 1,840 10,228 28,474 18,087 27, ,341 5,475 1,886 10,484 29,186 18,539 27, ,625 5,611 1,933 10,746 29,915 19,003 28, ,915 5, ,667 19,478 29, ,213 5, ,108 19,965 29, ,519 6, ,562 20,464 30, ,832 6, ,026 20,976 31, ,152 6, ,501 21,500 32, ,481 6, ,989 22,038 33, ,818 6, ,488 22,589 33, ,164 6, ,001 23,153 34, ,518 7, ,526 23,732 35, ,881 7, ,064 24,325 36, ,253 7, ,616 24,933 37,400 The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number It provides life assurance and pensions. Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London's customers to other insurance companies. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL ,538 18,131 24,354 26,196 38,335 7, ,025 7, ,330 17, ,760 25, ,752 24,963 26,851 39, ,425 7, , ,587 27,522 40, ,226 28,210 41, ,127 17, ,181 26,883 28,915 42,315 29,638 43,373 44,457 Find out more To find out more about the tool and how it can benefit you and your clients, speak to your usual Royal London contact. Alternatively, you can access the tool at adviser.royallondon.com 15

16 Royal London 1 Thistle Street, Edinburgh EH2 1DG royallondon.com All literature about products that carry the Royal London brand is available in large print format on request to the Marketing Department at Royal London, 1 Thistle Street, Edinburgh EH2 1DG. All of our printed products are produced on stock which is from FSC certified forests. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number It provides life assurance and pensions. Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London s customers to other insurance companies. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. April TG1498/3