Annuities & Drawdown - it is not black or white
Fixed term income plans – retirement options do not need to be black or white
It seems that every time I go a conference there is someone talking about the need for innovation in retirement income plans. Having watched various product developments over the last 20 year it comes as no surprise to me that the elusive new plan which fits half way between an annuity and drawdown has yet to gain universal acceptance.
The so called ‘third way products’ have struggled to gain support from advisers and the road to innovation is littered with the relics of unit-linked guarantees and with-profits annuities. Who remembers the brave but unsuccessful attempt by Lincoln to sell the i2Live variable annuity?
As an aside, Prudential’s Flexible Lifetime Annuity was a welcomed innovation and deserved better support as it was a natural successor the popular with-profits annuities, but it seems there is no appetite for investment-linked annuities when drawdown is available.
The last man standing in the race to develop innovative retirement income plans is the Fixed Term Income Plan.
These were first invented by Kim Leche-Thomsen at Living Time in 2007, now called Primetime Retirement. They solved the problem of how to get a guaranteed income without losing control by purchasing a lifetime annuity and retaining flexibility and control without taking the risks associated with pension drawdown.
The key to understanding fixed term income plans is to recognise the two different parts; the income that is paid for a set period of time and the maturity amount which is a lump sum paid back into the pension pot at the end of the term.
The unique and most appealing feature is the maturity value which is paid at the end of the term because this can be used to pay a lump sum (taxed at the recipient’s marginal rate of tax), purchase an annuity or remain invested under drawdown rules.
In my new guide about fixed term income plans I give four practical examples of how fixed term plans can be used in retirement planning.
The first example is a person who wants a guaranteed income but is concerned about low annuity rates and that their health may deteriorate in the future. They invested in a 5-year fixed term, took the same income as would have been paid from a lifetime annuity in the knowledge that they might benefit from higher annuity rates or an enhanced annuity at the end of term. Of course, a prudent adviser would point out that annuity rates could be even lower at the end of the term.
The second example reflected a common situation; someone wanting a relatively high level of secure income to bridge the gap between retirement and the start of the state pension.
The third example looked at the increasingly important issue of de-risking drawdown in later life. In this example, the retiree converted part of his large pension into a fixed term plan to provide secure income and the reduce risk.
The fourth example was a less frequent issue but never the less very important. A retiree with other sources of income and on the border between basic and higher rate tax who wanted to cash out a pension pot over several years and avoid paying higher rate tax.
My own view is that it is difficult to innovate the basic annuity because the unique advantage of the income for life comes from the mortality cross subsidy and any attempt to add bells and whistles to annuities reduces the benefits and attraction. I go further to say that most retirement objectives can be met by a combination of annuities and drawdown. In other words, it is not more product innovation we need but more innovation in the advice process.
The guide to Fixed Term Income Plans, sponsored by Primetime, can be downloaded at www.williamburrows.co.uk/guides