Intelligent Pensions, the market leading specialist pension adviser for IFAs, has launched an annuity drawdown service in response to the increasing risks advisers and their clients could face as a result of the recent changes to drawdown. This will enable clients to enjoy a phased transition over several years using a combination of conventional and asset backed annuities to suit individual cases, with introducing IFAs continuing to be paid for the ongoing service.

The national drawdown book, some £20bn, is gradually maturing and under the new drawdown rules investors could easily find themselves staying in drawdown for longer than is suitable.

Andrew Pennie, Marketing Director said “Drawdown becomes less suitable as clients get older as a result of the opportunity cost of ‘mortality cross subsidy’ available from conventional or asset backed annuities. From ages 70 to 80, the impact of mortality subsidy rises rapidly and by age 80, the ‘hurdle rate’ for Drawdown to keep pace with mortality subsidy becomes unrealistic. The risks, to advisers and their clients, of staying in drawdown for too long are very real. As specialists in the area of ‘in retirement planning’ we are handling these situations on a daily basis, and have processes in place to help avoid some of the pitfalls – and also some of the claims which IFAs might face ”

Pennie added “There is no one magical day for buying an annuity and as conventional annuities are an effective ‘one way street’ this is a dangerous approach to take. Our annuity drawdown service will adopt a progressive approach. Through the combination of conventional and investment linked annuities, the annuity drawdown service will support advisers by delivering bespoke and compliant exit strategies that meet the needs of their clients.”

The Intelligent Pensions annuity drawdown service is available only through financial advisers.

Contact Andrew Pennie to discuss this article

Article: Intelligent Pensions reduces risk for IFAs and clients | Publication: FT Adviser | Date: 06 June 2011 | Author: Aamina Zafar | Quoted: Andrew Pennie

Intelligent Pensions has launched an annuity drawdown service in response to the increasing risks advisers and their clients could face as a result of the recent changes to drawdown.

Andrew Pennie, marketing director for Intelligent Pensions, said clients can enjoy a phased transition over several years using a combination of conventional and asset-backed annuities to suit individual cases.

He said that IFAs who introduce clients will also be continued to be paid for the ongoing service.

Mr Pennie added: “Drawdown becomes less suitable as clients get older as a result of the opportunity cost of ‘mortality cross subsidy’ available from conventional or asset-backed annuities.

“From ages 70 to 80, the effect of mortality subsidy rises rapidly and by age 80, the ‘hurdle rate’ for drawdown to keep pace with mortality subsidy becomes unrealistic.

“The risks, to advisers and their clients, of staying in drawdown for too long are real. As specialists in the area of in-retirement planning, we are handling these situations each day, and have processes in place to help avoid some of the pitfalls – and also some of the claims that IFAs might face.”

This comes as the national drawdown book, some £20bn, is gradually maturing and under the new drawdown rules investors could easily find themselves staying in drawdown for longer than is suitable.

Contact Andrew to discuss any of his comments from this article

Article: Asset-backed contribution tax rules set for a change | Publication: FT Adviser | Date: 02 June 2011 | Author: Marc Shoffman | Quoted: David Trenner

The government has proposed changing tax rules around employer asset-backed contributions used to fund defined benefit pension schemes.

HM Revenue and Customs has announced it wants to limit unintended relief that is greater than the fair value of plan assets received by the pension scheme

In a 30-page consultation document, HMRC said: “This can arise where tax relief is given twice: up-front for the discounted value of a future income stream and again for each instalment of the income stream.

“It can also arise where the employer structures an income stream so that it is conditional on the future funding position of the pension scheme, resulting in a situation where tax relief given up-front may exceed the final value received by the pension scheme. These unintended effects result from the complex interaction of tax and accounting rules.”

The paper recognised the structure as a “flexible alternative” to making a one-off lump sum contribution, but added: “The government is concerned that more complex arrangements can give rise to unintended tax consequences, particularly excess relief.

“The government seeks to ensure that the tax relief system remains affordable and sustainable for the Exchequer, while minimising complexity in the tax rules wherever possible.”

It proposed either providing relief only when cash is received by scheme, stating: “This would remove automatic upfront tax relief for asset-backed contributions. Instead, employer tax relief would be given only when cash actually changes hands between the employer and the pension scheme, or when the scheme acquires full title to an asset that can readily be converted into cash.”

Another option was to align tax rules with accounting rules to ensure the tax treatment of the arrangements as a whole reflects the economic substance of the transaction..

The consultation ends on 16 August.

Eileen Haughey, associate partner for Deloitte Pensions Advisory, said: “Asset-backed funding structures are now established as a viable alternative to cash funding schemes. These arrangements increase the security of schemes, providing greater protection for members’ benefits, and can help pension schemes mitigate the risk of falling into the Pension Protection Fund as a result of company insolvency.”

David Trenner, technical director for Glasgow-based Intelligent Pensions, said: “If assets are valued fairly and used in the pension scheme why should they not get full tax relief.

“This consultation is really about changing the valuation basis. What is important is you do not restrict this method of funding.”

Contact David to discuss any of his comments from this article

Article: ‘IFAs need to educate clients on drawdown’ | Publication: FT Adviser | Date: 26 May 2011 | Author: Julia Bradshaw | Quoted: Andrew Pennie

Advisers should consider recommending phased drawdown as tax changes for pension death benefits could hit clients who take the full amount, according to a retirement planning specialist.

Andrew Pennie, marketing director for Intelligent Pensions, said many Sipp providers see mainly full drawdown, despite the tax on lump-sum payments rising from 35 per cent to 55 per cent.

He said: “Phased drawdown, while slightly more complex, is a far more tax-efficient strategy and offers many additional benefits for clients, such as improved flexibility and better tax treatment of death benefits.

“Unless someone has debt to repay and no other source of funds, why would the best advice be telling a client to withdraw their tax-free cash when they do not need to use it? It is far better to take instalments of cash.

“Advisers need to educate clients about the benefits of not taking their full tax-free cash at the outset and should be challenging clients where this action would not be in their best interests.”

Will Palmer, financial development manager for South Yorkshire-based Atkinson Smith, said he agreed with Mr Pennie but that it was often difficult to persuade clients to make a rational decision.

He said: “If a client draws money out and puts it in the bank for no purpose, he is making the situation worse by making the funds liable to tax.

“However phased drawdown never quite seems to to tick the boxes with clients because the decision is not just based on the best tax option. People feel vulnerable about money in a pension and more secure with it in a bank. It is a psychological thing. People do not always act rationally or want the rational outcome.”

Contact Andrew to discuss any of his comments from this article

Article: Life Length test linked to enhanced annuities | Publication: FT Adviser | Date: 26 May 2011 | Author: Katie Morley | Quoted: David Trenner

A new DNA test may have a significant effect on the value of enhanced annuities worth more than £50,000, according to John Lawson, head of pensions policy at Standard Life.

The over-the-counter test, unveiled by analysis company Life Length, measures the length of telomeres – either of the sections of DNA occurring at the ends of a chromosome – to gauge how fast a person is ageing.

According to Mr Lawson, the development raises the possibility once again that DNA tests could be used to determine the value of enhanced annuities within six years, if the tests receive government backing.

This means IFAs would have to make sure that their clients were aware of these tests when it comes to retirement planning.

The Life Length test costs £400 and will become available to the British public later this year, although it has yet to be accredited by the Department of Health.

Mr Lawson said: “Our agreement with the Department of Health, which prevents us from using genetic testing, will be up for review in 2017.”

Currently insurance providers can only use genetic testing for Huntington’s disease on life insurance worth £500,000 or more, but Mr Lawson said the limit for annuities could be much lower.

He said: “If this test proves to be accurate, I can see a future market in which insurers use, and may even demand, genetic testing for annuities worth more than £50,000.

“I doubt whether there has ever been a case where genetic testing has been used.”

Joseph Lu, longevity expert at Legal & General, said: “It is still unclear if the telomeres test would be useful for predicting longevity, after accounting for other factors linked to longevity.

“So, although the test is an interesting development and one that we will monitor, it is too early to assess what effect, if any, it will have on annuities at this stage.”

David Trenner, technical director for Glasgow-based Intelligent Pensions, said: “It sounds like a sensible idea. I have been saying for a long time that providers should have their annuities underwritten properly, although I would not necessarily want to be told that, based on my DNA, I am not expected to live that long.”

Carl Lamb, managing director of Norfolk-based Almary Green Investments, said: “In principle this test sounds like a good idea. It will be a positive development if it helps people make choices and speeds up the process.”

Contact David to discuss any of his comments from this article

Effect of mortality cross-subsidy

Article: A question of timing | Publication: ifaonline | Date: 24 May 2011 | Author: Helen Morrissey | Quoted: David Trenner

The new drawdown regime means clients can stay in drawdown indefinitely. However, Helen Morrissey says that clients could actually lose out on income by not annuitising at the right time

The removal of the Age 75 rule has opened up a whole new world of flexibility for advisers and their clients who can choose to remain in income drawdown indefinitely.

But while this extra flexibility is no doubt good news for many people, the actual numbers of those with the necessary funds to utilise income drawdown remains small.

Recent data from the Pensions Policy Institute states that between 600,000-700,000 people aged between 55-75 in 2010 could potentially make use of capped drawdown. This represents 5% of all people aged 55-75 years of age in 2010.

The report also concluded that only about 200,000 currently have sufficient pension and DC savings to meet the Minimum Income Requirement (MIR), and have enough left over to use flexible drawdown.

As a result, the report ­summarised that “for the vast majority of people, annuitising is likely to remain the safest and most appropriate option of accessing private DC pension savings.”

But while the numbers of people able to utilise ­income drawdown ­remain small, there is plenty of scope for this number to increase, says Pensions Policy Institute ­research director Chris Curry.

“At the moment, relatively few people are taking advantage of the new flexibilities within drawdown, but we think this will change over time as people’s DC pension pots build up,” he says.

“We might see more use of income drawdown for smaller pots, particularly if they have other ­assets elsewhere and they can afford to take on a bit more risk.”

He is joined by The Retirement Adviser’s director Nick Flynn, who says that even if clients are not actively using flexible drawdown now, it is certainly something that is of interest to them in the future.

“The changes have opened doors, with some clients starting to ­consider going into income ­drawdown who may not have done it before,” he says.

“Flexible drawdown is starting to interest people and they are looking into using annuities to help them satisfy the MIR.”

However, while the extra ­flexibility that comes with not having to ­annuitise at 75 is good news, it does throw up issues of concern.

As it stands, the vast majority of people annuitise between 60-65 years of age. There remains a small number of primarily wealthy clients who wait until they are compelled to do so.

But there are concerns that by remaining in drawdown indefinitely, these people could lose out on the benefits of mortality cross-subsidy and could end up losing out on income as a result.

Figures from MGM Advantage show that a 70-year-old man living for 20 years with a pension fund worth £100,000 could actually miss out on more than £70,000 worth of income by not annuitising.

This is backed up by figures from the Pensions Policy Institute that say that by the age of 74, a ­client’s portfolio would need to receive 6.5% in investment growth per year to make up for the cross-subsidy that they would have gained from purchasing an annuity at state pension age.

According to retirement advice company Intelligent Pensions, the best time for many clients to implement their exit strategy from drawdown is somewhere between 70 and 80 years of age.

Its technical director David ­Trenner says: “The effect of ­mortality cross-subsidy for a 60-year-old is probably about 0.5% per year.

“By the time the client hits 70, the effect of mortality cross-subsidy goes up to 1-2% and by the time the client hits 80, then this rises again to about 4%.

“Now if you have interest rates of 6% and you are getting 4% from the mortality cross-subsidy, then you would be taking on a lot of ­investment risk if you wanted to generate those kinds of returns via income drawdown.”

While the issue of mortality cross-subsidy is not new, it is something that will become of real interest to advisers who are managing income drawdown portfolios for their ­clients over the long term.

Andrew Tully, pensions ­technical manager at MGM Advantage, ­believes advisers will need to regularly assess whether clients are getting the best deal in income drawdown or whether they should actually look to annuitise instead.

He says: “The issue of mortality cross-subsidy has always existed, but because there was an ­effective ­compulsion to purchase an ­annuity by age 75 then, it wasn’t a great ­issue. Once you go beyond age 75, mortality cross-subsidy ­becomes a big issue. It’s an old issue that has been given new resonance.

“Clients and their advisers need to consider carefully whether remaining in income drawdown is the right thing for them. I believe advisers have a vital role to play in making sure clients are making the right decisions for their financial income.”

The new drawdown regime means clients can stay in drawdown indefinitely. However, Helen Morrissey says that clients could actually lose out on income by not annuitising at the right time

Role of advisers

As a result, advisers will need to make sure that their clients are kept abreast of whether remaining in income drawdown is still in their best interest.

However, Trenner says ­broaching the subject of annuities with a ­reluctant client can prove difficult. He also claims that this reluctance to annuitise can often be as a result of misconceptions as to how ­annuities work, which can prove a real challenge for advisers.

He says: “A lot of clients don’t understand how an annuity works and they think that when they die, the insurance company gets their money. Of course, that isn’t true, but getting this point across to people can be very difficult.”

According to Flynn, advisers will need to deal with the issue on a regular basis and be sure to point out all the options to their clients.

“We take the view of telling the clients on an annual basis what they could have got if they had gone into an annuity,” he says.

“It’s a real education piece for the adviser to ensure the client ­understands the risks of remaining in income drawdown. They also need to bear in mind the 55% tax charge incurred in the estate if the client dies in income drawdown.

He continues: “The review process must focus on what the client could ­potentially be missing out on. It is also ­important to note that as the client ages, their health will ­deteriorate and they could benefit from an enhanced rate.”

So what options are available to an adviser once they determine that a client should start to move towards annuitisation? What effect will this have on the future shape of the annuities market?

Curry believes the annuity market will remain robust. He says: “When you ask people what they would like from their retirement income, then they are unlikely to say they want an annuity. However, when they start to describe what they want, their description is very much like one as they talk about a need for security. I think we will see more people looking to take advantage of this flexibility early on in their retirement and then annuitise later on.”

Trenner advocates a step-by-step approach with solutions tailored for the clients’ specific circumstances.

“If you had £200,000 in any one investment, then it’s very rarely a good idea to sell it all on one day,” he says.

“Putting all of your money into an annuity on one day is also a ­gamble. The key message is just because the Age 75 rule isn’t there anymore, doesn’t mean you don’t have to buy an annuity.

“Flexible drawdown will be attractive as a means of taking a higher percentage of the fund out. It’s all about the client’s ability to take on risk. For instance, if you are a doctor with a pension of £50,000 per year, then you can afford to stay in drawdown for longer, but it is dependent on the individual client’s circumstances.”

Vince Smith-Hughes, head of business development: pensions at Prudential, agrees we will see shifts in how the annuity market is shaped with more advisers looking to blend a number of products for their clients rather than relying on one annuity.

“At the moment, a lot of people are still annuitising between 60-65 years of age as their plans mature. That won’t change for a large majority of people, but we could see a wider range of annuities being used.

“A number of advisers are ­actively talking about taking a mix-and-match approach, with some advisers saying they will consider using a multi-product solution for any client with more than about £80,000.”

So while the vast majority of ­people will continue to annuitise, we may well see them looking to take this decision later.

But while many of these ­people may dislike the concept of ­annuitisation, advisers will need to make sure they are aware of the potential dangers of drifting along in drawdown over the long term.

Regular reviews and a focus on educating the client on the pros and cons of drawdown and annuities will do much to protect them from retirement income falls.

Contact David to discuss any of his comments from this article

Case study: Phased and flexible drawdown

Article: A better way to draw your pension | Publication: Investors Chronicle | Date: 23 May 2011 | Author: Maike Currie | Quoted: Andrew Pennie

More and more pension investors are choosing to draw an income directly from their pension pot, rather than buying an annuity, but few think about what happens to a lifetime of savings when they die. Most are unaware that following changes to pension rules in April this year, there is a tax charge of 55 per cent on any funds remaining. But if you structure your drawdown carefully, you might be able ensure that your family receives a greater proportion of your pension.

If you die before taking an income from your pension, your pot will be entirely free of tax as long as you are under age 75. The 55 per cent charge on lump sum benefits only applies in this instance to investors age 75 or older at the time of death.

But if you have started to draw an income from your pension via drawdown, any lump sum remaining in the pension when you die will be taxed at 55 per cent. While this is better than the 82 per cent tax charged on death after age 75 under the old pensions regime, it is a higher rate than the 35 per cent charge that previously applied for those under the age of 75.

Advisers argue that a phased drawdown plan can be a much more tax efficient strategy in the light of the tax rise on lump sum payments from 35 per cent to 55 per cent.

Under phased drawdown, you move your pension into drawdown in a number of chunks, depending on the income you need from it. If you die before age 75 and want to bequeath your pension pot as a lump sum, the bit which is in drawdown would be subject to a 55 per cent charge, whereas the bit that has not been moved into drawdown is deemed untouched – and can be passed on as a lump sum tax-free.

 

WHAT ABOUT FINAL SALARY?
If you’re in a final salary (defined benefit) pension scheme, should you switch into a drawdown arrangement? There are some cases where it would be worth considering. See Final salary or flexible drawdown.

 

Phased drawdown means that you cannot take all your 25 per cent tax free cash right away. If you do, this will mean that your entire pension fund will be crystalised and on your death, 55 per cent of the fund will be taxed before it passes to your dependants.

“By phased drawdown, you create a situation where you elongate the period of drawing out your cash lump sum so that you don’t crystalise your entire fund in one go. Instead you draw your tax free cash in small amounts over a period of time, in this way maximising the capital that will be passed to your family tax free on your death,” explains Murray Smith, director at pension consultants, Mattioli Woods.

Andrew Pennie, marketing director of Intelligent Pensions says: “Unless someone has debt to repay and no other source of funds, why would best advice be telling a client to withdraw their tax-free cash when they don’t need it? Far better to take instalments of cash as part of the pre 75 retirement income.”

‘Phasing’ can be applied to either flexible or capped drawdown but bear in mind that once you hit age 75 there is no saving – because even those funds which have not been moved into drawdown would be subject to the 55 per cent tax.

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Sixty-year-old Mr Smith is a widower with two adult children. He has a final salary pension of just over £21,000 per annum and will also receive a state pension from his mid-sixties. He therefore qualifies for the £20,000 minimum income requirement under flexible drawdown.

He wants to draw an adequate pension income to maintain his lifestyle but also wants to preserve capital and provide a residual benefit to the family, particularly if he dies early.

He has a self-invested personal pension (Sipp) valued at circa £600,000 and other investments (excluding principal residence) of circa £300,000. As such, he has no real need for additional capital but requires an ongoing income of £50,000 gross per annum. He therefore wants the Sipp to provide an income of £30,000 per annum.

Using flexible drawdown, income from the Sipp will be made up of £10,000 tax-free cash and £20,000 taxable income under flexible drawdown. This creates tax efficiency in that his total income would largely only be subject to basic-rate tax. Accordingly, and even without growth, phasing out of tax-free cash would last for at least 15 years, if not longer, with the critical point being that should death occur in the early years of this process, a significantly greater level of the pension fund could be payable to his family without tax.

Source: Mattioli Woods

Contact Andrew to discuss any of his comments from this article

Leading Retirement Income Specialists Intelligent Pensions have highlighted a potential problem for current clients in full drawdown where the death benefit was a key feature of the original recommendation.  Technical Director David Trenner says “With the increase in tax charge, the death benefits in drawdown are now less attractive and in some cases may even undermine the justification of the original advice. Advisers would do well to review their clients’ position and reassess suitability in these cases.”

For clients who die after the age of 75 the rate of death tax has been reduced and equalised with pre-75 rates at 55%. Previously up to 82% tax could arise on death after 75, but on death before 75 the charge was only 35%.

Trenner added a warning against staying in drawdown too long.  “The reduced post 75 tax charge is likely to be more attractive to clients than before. However, by age 75 the ‘opportunity cost’ of mortality subsidy, available from annuities, is quite high for males. The vast majority of drawdown clients would benefit from a phased exit strategy building in annuities between ages 70 and 80. Staying in drawdown too long becomes increasingly unsuitable due to mortality drag and advisers need to be on their toes.”

Contact David to discuss any of his comments from this article

Intelligent Pensions, the pension and retirement specialists for IFAs, says that a large proportion of the £20bn UK drawdown book is in full drawdown and is calling for greater use of phased drawdown strategies in future, particularly in light of the recent changes to the tax treatment of pension death benefits under which the tax on lump sum payments has risen from 35% to 55%.

Andrew Pennie, Marketing Director said “Phased drawdown, while slightly more complex, is a far more tax efficient strategy and offers many additional benefits for clients such as improved flexibility and better tax treatment of death benefits. We recommend phased drawdown for the vast majority of our clients and were surprised to learn that many SIPP providers have a very different experience. One SIPP provider confirmed to us that over 75% of their drawdown business goes into full drawdown.”

Pennie added “Unless someone has debt to repay and no other source of funds why would best advice be telling a client to withdraw their tax free cash when they don’t need it? Far better to take instalments of cash as part of the pre 75 retirement income. Advisers need to educate clients about the benefits of not taking their full tax free cash at the outset and should be challenging clients where this action would not be in their best interests.”

The opportunity to pass pension assets to beneficiaries on death free of tax still applies for uncrystallised benefits and is a clear benefit of a phased drawdown approach, says the company.

Contact Andrew to discuss any of his comments from this article

Article: The £75,000 cost of being adrift in drawdown | Publication: MoneyMarketing | Date: 05 May 2011 | Author: Tom Selby

Investors risk missing out on up to £75,000 of retirement income by staying in drawdown following the Government’s abolition of annuitisation requirements.

Joint research by MGM Advantage and IFA Intelligent Pensions suggests a 70 year-old with a £100,000 pot could lose out on £75,900 if they stay in drawdown for a further 20 years.

The difference relates to the mortality cross-subsidy, where funds of people who have died earlier than expected are pooled and shared among remaining clients. MGM Advantage pays this cross-subsidy through a lifetime bonus.

Sales and marketing director Aston Goodey says: “There is a huge danger that now people are not obliged to purchase an annuity at 75, they will drift along in drawdown without fully understanding the progressive nature of its risk. Drawdown becomes less suitable over time, as, beyond 75, the ability to deliver consistent investment returns that will compensate for the absence of mortality cross-subsidy becomes unrealistic. This, coupled with rising inflation, highlights how unsuitable drawdown is as a long-term solution for some people.”

The research, based on quotes from the MGM Advantage flexible income annuity, shows a 60 year-old with a £100,000 fund could miss out on £27,200 if they stayed in drawdown for 20 years, while a 65-year-old would receive £45,500 less.

Based on a quote for the MGM Advantage flexible income annuity, male, single life with £100,000 pot, showing the predicted mortality cross-subsidy (lifetime bonus)

Contact David Trenner to discuss this article