Guaranteed income drawdown: Pension insurance
Your clients insure their home, their car, their lives and even their pets. Now they can also insure their immediate or future retirement income while maintaining the potential for it to grow by keeping their funds invested up to retirement and beyond.
There have been many changes to the rules surrounding income drawdown during the past 10 years and somewhere along the way, one innovative type of solution has been lost in the noise: guaranteed income drawdown. The FSA’s own consumer website, Money Advice Service, refers to this type of solution as a “hybrid product”, yet the majority of financial advisers are still not drawing this type of solution to their clients’ attention.
When you consider the steady decline of annuity rates and rapid decline of government actuary’s department limits, this option provides more value than ever before, with good levels of income guarantees available in the market. Currently, some unit-linked guaranteed providers are offering as much as 85 per cent of the current maximum GAD withdrawals for a 65-year-old male and 92 per cent of maximum GAD withdrawals for females.
Advisers who have not reviewed these guaranteed drawdown solutions recently may want to look at them again. The primary factor for clients in selecting income drawdown is still to provide them with an income, but how many clients are aware they can secure a minimum income underpin for life, under an income drawdown plan, and at such a high level of maximum GAD?
This means that the income drawn would be sustained for the customer’s lifetime, and would not reduce even if any of the following were to happen:
• the fund value falls or even runs out;
• interest rates fall or remain low; or
• GAD limits reduce further.
In principle, pensioners can:
• retain ownership of their pension fund – no requirement for annuity purchase creates future flexibility;
• build in a minimum lifetime income guarantee – clients will never outlive their capital;
• protect their capital on death – their spouse or their family will benefit from their pension fund, either as income or as a lump sum on death; and
• protect an income for their spouse today – the income continues for the life of the spouse too, without having to give away access to their pension fund today.
The fall in gilt yields mean that the August 2012 drawdown yield was just 2 per cent; this is the lowest underlying yield since income drawdown started in July 1995. For those already in drawdown, the yield is just one potentially bad piece of news for anyone facing a review of their maximum income levels.
There are three other unwelcome aspects to current reviews:
• maximum drawdown was reduced by the Finance Act 2011 from 120 per cent of GAD to 100 per cent;
• the revised GAD rates introduced in April 2011 are generally lower than previous calculations; and