TISA The Decumulation Deep Dive Building The Retirement Account Andrew Tully Pensions Technical Director Retirement Advantage
Today Why was there a need for innovation? What did we design and how does it work? What people may benefit from using new solutions? 2
The retirement market after pension freedom 50,000 or less These clients used to buy annuities. Most will take cash, in one go or in instalments. CASH OUT 50,000-250,000 Would usually have bought annuities before the budget. Will be attracted by flexibility, and many more will use drawdown. Their needs haven t changed, they still need guaranteed income, but now have access to their pension fund as well NEED FOR INNOVATION 250,000 or more These clients did drawdown before the budget and will continue to do so (with more income flexibility and legacy potential). DRAWDOWN 3
Retirement is different to saving Accumulation Fixed term horizon Converting income to capital Investing for growth Increasing capital Pound cost averaging Decumulation Unknown time horizon Converting capital to income Investing for income Reducing capital Pound cost ravaging Taking an income in retirement is different to saving for retirement Drawdown provides great flexibility, but it comes with many risks including Longevity risk, Investment risk and Sequence of returns risk Those with smaller funds, who have greater reliance on that income, may have lower capacity for loss 4
Meeting the challenge of clients Certainty Income certainty Capital security Continued income for dependants Legacy for loved ones Flexibility Growth potential Access to cash Flexible when my circumstances change Flexible when markets change 5
What is The Retirement Account? The Retirement Account combines Pension Savings (uncrystallised), alongside a Pension Drawdown facility and a Guaranteed Annuity held within a tax-advantaged wrapper. Pension Drawdown Crystallised Pension Savings Uncrystallised Pension Drawdown Guaranteed Annuity Cash Account 6
Flexibility and certainty Flexi-access drawdown wrapper Pension Savings Used to phase retirement (opportunity for investment growth and tax planning) Benefits can be crystallised into Pension Drawdown at any time (25% taxfree cash) Pension Drawdown Drawdown with simplified investment choice Can be same investment decision as PS or different Cash account for holding funds when not immediately needed Can be used as a nest egg or for providing regular or ad-hoc income Guaranteed Annuity An annuity written under drawdown rules Guaranteed income for life taking into account health & lifestyle 30 year guarantees, value protection and commutation Provides the security of an annuity but under drawdown rules One illustration, one application, one annual report 7
The Retirement Account Designed with flexibility to manage capacity for loss Drawdown Annuity Absorb Retirement Risk Full Drawdown Drawdown Annuity Insure Retirement Risk Blend DD with Guaranteed Income Drawdown Annuity Avoid Retirement Risk Full Guaranteed Income 8
Income flexibility Reinvest surplus income Guaranteed Annuity Drawdown Account Cash Account Stop/start/reduce annuity income customer receives at any time Not taxed as it hasn t left the pension wrapper Access reinvested income when needed 9
Cope with changing client circumstances Create increasing income and de-risk portfolios Clients can gradually annuitise to lock in growth, and benefit from higher annuity rates as they age or become less healthy 10
Pass funds to family Legacy and tax control Pension Savings (remaining funds) Pension Drawdown (remaining funds) Guaranteed Lifetime Annuity with death benefits (Money-back option or up to 30 yr guarantee) Both annuity and drawdown/savings elements pass to successor drawdown account on death Successor Drawdown Account Lump sum, income, buy annuity, leave invested or transfer away 11
Example of death benefits Scott invested 200,000 in drawdown and bought an annuity providing an income of 10,000 a year, with a 30 year guarantee. He dies age 79, 14 years after the annuity started leaving his wife, Joanne, and grown up daughter Lauren Pension Drawdown (remaining funds 250,000) TRA Drawdown Account for Joanne Annuity death benefits 16 yrs x 10,000, OR Commuted lump sum Benefits Tax control Potential less tax on annuity death benefits (eg VP paid as immediate lump sum) More flexibility (eg income or commutation on guarantee) Ongoing legacy planning to family Joanne has same flexibility. Take income, lump sums, leave invested, buy annuity. Tax control and flexibility 12
Strong investment governance: independence Square Mile Investment Investment experts Up to date information on fund strategy Understanding of fund objectives and how it meets them Retirement Advantage Understanding of customer needs in retirement Has the strongest commitment to governance, compared to any other provider we partner with Richard Romer-Lee, Square Mile Consistent and regular reviews of funds ensuring they continue to meet their stated objectives Minutes published on our website 13
The Retirement Account What type of customer may use De-risking drawdown Guarantee essential expenditure Rainy day fund Final salary transfers Initially use drawdown phasing tax-free cash, top up other income etc Increase use of guaranteed income as get older and as health deteriorates. Use annuity to give peace-of-mind that essential expenditure is covered for life. But income flexible should circumstances change. Remainder invested in drawdown to benefit from growth, and give flexibility. People who largely want guaranteed income but with flexibility and tax control on death. Retain some funds in drawdown to give flexibility. Appropriate guaranteed income tailored to customer s circumstances. With remainder invested in drawdown. May be suitable for those in poor health, single, divorced, widowed, heavily in debt. 14
Case study: De-risking a final salary transfer Male age 58, divorced, children, moderate ill-health, wants to leave legacy. Final salary scheme, transfer value 485,000 Benefits from DB scheme Tax-free lump sum - 61,600 Pension - 10,400 (at 65) - 50% spouses benefit, 5 year guaranteed, escalating at LPI Pension reduced to 8,200 at age 58. Transfer to Retirement Acc Tax-free lump sum - 121,250 Pension - 10,400 (using 260,000 of fund) - 100% money-back guarantee, no escalation. Pension Drawdown - 102,000 Figures as at March 2017. 100% money-back guarantee, invested in Protected Index Portfolio, 0.5% initial + 0.5% ongoing fees. For DB transfers, outcome depends on the individual circumstances of each client 15
G r o s s i n c o m e Case study: flexibility and tax control 60,000 50,000 40,000 30,000 20,000 10,000 400k to TRA, wants same net income as when working fulltime 42,579. She crystallises 59,280. TFC 14,820 and 44,460 in DD (next 5 years). Uses last of TFC at 65 for income + ISA State Pension starts at age 66 as income needs reduce. Income of approx. 25,000 net from State pension + drawdown Husband dies and attitude to risk and capacity for loss changes. 2/3rds of fund used for annuity, 127k invested in drawdown. 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 F u n d v a l u e 0 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 0 Salary State Pension TRA Annuity income taken Pension savings fund value (3.8% mid-growth rate) Tax-free cash Drawdown income Drawdown fund value (3.8% mid-growth rate) This example assumes the State Pension increases at 2.5% per year. Starting figure is based on 17/18 maximum increased by 2.5% between ages 60 and 66. Salary assumes 1% increase each year. Drawdown fund value figures shown are at the end of the year. Any reference to income tax figures are based on 2017/18 personal allowance and tax thresholds. This is an example only. 16
The Retirement Account: Certainty and Flexibility Pension Savings (phased) Sleep-easy flexi access drawdown Guaranteed annuity Passive, active, protected funds & Governance The ability to tax-efficiently phase retirement Flexibility and legacy through flexi-access drawdown Guaranteed income personalised to client needs, at outset or later in retirement Protection to mitigate volatility and investment risk Independent investment governance 17
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