Flexible Income Annuity

Transcription

1 Flexible Income Annuity Transfers Out Flexible Income Annuity Transfers out One of the valuable features of Flexible Income Annuity (FIA) is the ability for your clients to transfer out at any time, and buy an annuity with a different provider. Many providers do not offer this service (and historically none did), but it can be of value to customers, depending on their circumstances. The transfer value will represent a fair value in present money terms of all future annuity payments to the customer, which means taking into account their current life expectancy. Because our main aim is to provide value for money for continuing annuitants we need to ensure any funds transferred out do not take advantage of the annuitants that remain. There is no source of extra profit for Retirement Advantage. 1

2 When can the customer transfer? There are only a couple of conditions on transfers out of FIA: 1. There has to be an accepting provider. Retirement Advantage will allow a transfer out, but the receiving annuity provider has to sign that they are happy to accept the transfer to provide a lifetime annuity. 2. The transfer out has to buy a lifetime annuity. So, the customer cannot transfer out and, for example, buy a drawdown contract with another provider. The new annuity terms can be reshaped*, for example: - To provide a single life annuity where the original annuity included provision for a spouse who has died before the main annuitant. - To provide a guarantee for up to 10 years (whether or not the original annuity made such provision). *RPSM Technical pages: member benefits: A secured pension: Lifetime annuity: Transfer to another insurance company. Transfer of a lifetime annuity from one insurance company to another [Para 3(2B) to (2D), Sch 28] [Para 13(3), Sch 10, FA 2005][ Regulation 6 The Pensions (Transfers of Sums and Assets) Regulations 2006 (SI 2006/499)] Calculating the transfer value Retirement Advantage will calculate the transfer value of the annuity. We will make sure we give a fair value, taking into account the other annuitants who remain with us. The transfer value could be lower than the current fund value because: The customer s health, or that of their dependants, may have deteriorated faster than was expected, and therefore future income would have been paid for a shorter time than initially expected. We therefore underwrite any applications for transfer out and form a view as to the likely resulting life expectancy. Lifetime bonus has been added to the policy based on the assumption that the policy is not transferred out. For a policy transferring out, the amount of lifetime bonus added may be higher than is due on a fair basis up to that point. We make a deduction to recover the initial costs we incurred in setting up the policy if the customer transfers out within the first five years (see below). We will make a charge for processing the transfer (see below). Retirement Advantage does not keep the difference between the fund value and the transfer value as profit. This is the money we believe would have been available if the individual had remained in FIA until death, and it, therefore, supports the payment of lifetime bonus for other annuitants. If the customer s health has worsened since they took out a FIA, then the transfer value will be reduced, because their life expectancy has also fallen and we assume we will be paying the annuity for fewer years. This is fair because the principle of a pooled annuity relies on those who don t live long supporting those who live a long time. Apart from the administration costs incurred by Retirement Advantage for processing a transfer (see below) and the costs of setting up a new annuity, a customer should get a similar income after transferring out as the benchmark income they would have received if they had remained within FIA. 2

3 Charges Flexible Income Annuity Transfers Out When a customer decides to transfer out from FIA, there may also be charges to recover our costs: 1. There is a charge in the first five years to recover initial expenses. Annuitant transfers in year Charge applied on fee-based cases* 1 2.5% 2 2% 3 1.5% 4 1% 5 0.5% *Different terms apply on commission based cases. Please ifaservice@retirementadvantage.com for details. 2. The need to establish the customer s life expectancy means there is a modest administration charge of 250 to help recover our additional costs. The 250 charge is increased by RPI from 31/12/2013 up to the date of the transfer value calculation. When might a customer want to transfer out? Customers may want to transfer to a different provider: if they no longer need the flexibility of a variable income, or they no longer wish their income to be linked to investments, and they believe they can secure a better fixed rate with a new provider than the FIA fixed income option offers them. Rates offered with the new provider would have to be sufficiently better to outweigh the costs of the move. In general we expect moving to a new provider might give incomes comparable to that by remaining in FIA, depending on the terms on offer from other companies. This is also true for customers whose health deteriorates, because the resulting lower transfer value from the lower life expectancy is matched by correspondingly higher enhanced or impaired annuity rates available in the market. However, transferring to another provider may result in additional charges and new advice fees, so in practice customers may see some reduction in income, unless the other provider offers better annuity rates. 3

4 Case studies Meet Trevor Trevor is retired and is 69 years old. In February 2014 he invested in FIA, but in late 2017 he wants to have certainty in his retirement income so wants to change to a fixed income. When Trevor invested in FIA his pot was worth 150,000 (after tax-free cash had been taken). Trevor decided to take 100% of income set at 8,900 for the first three years, and 8,800 when the FIA was reviewed earlier in The fund value is now 139,000, and a quote for a fixed income option in FIA gives 8,950, reflecting in part a rise in fixed interest investment yields since Trevor took the policy out. As Trevor remains in good health, his transfer value is calculated based on the life expectancy for a healthy individual so is approximately equal to the fund value. But because he is transferring in the fourth year there will be a charge of 1% of the transfer value to recover initial costs. In addition there is an administration fee of 265 (assuming inflation was around 2% per year) for the cost of making the transfer. This means his final transfer value is 137,000. Trevor takes this value to an IFA who can only find a best income of 8,850 a year, after paying the advice fee. Trevor decides to stay with Retirement Advantage converting to a fixed income within FIA. 4

5 Flexible Income Annuity Transfers Out Meet Kevan and Justine Kevan and Justine Smith took out a Flexible Income Annuity nearly six years ago (in 2010) when they were 65 and 62 respectively. The annuity was set up with a 67% spousal benefit, both were healthy. They invested 100,000 and took benchmark income of 5,280 at a required fund performance of 3.9%. At the first 3-year review, performance exceeded the required fund performance such that income went up to 5,440. Kevan s fund at that time was 97,250, lower than the initial premium. This is expected as the fund gradually reduces over the annuitant s lifetime as income is taken out. The fund was still higher than expected at this point hence the increase in income. Two and a half years later, Kevan s wife Justine dies. Shortly after this (in 2016), Kevan considered converting to fixed income as his circumstances had changed. Under the FIA fixed income option he was quoted 5,520. He wonders if he would get a better rate from transferring away from FIA and explores what income he can achieve on the open market. His fund value at this point is 93,100 (again fallen due to natural reduction over time). Kevan remains in good health. However because his wife has died, the transfer value will decrease as their combined life expectancy has reduced. As Kevan is transferring out more than 5 years from the start of the plan there are no recovery of initial expenses but there is a 280 administration charge. The transfer value is 79,580. The adviser gets a quote from another annuity provider showing income of 5,590, 70 a year more income than the FIA fixed income option. Although Kevan can choose any income level between 2,800 and 6,720 at the current time with his Flexible Income Annuity he no longer wants the investment exposure. He decides to take the transfer value and buy the annuity of 5,590 with the other provider. 5

6 Meet Bernice In 2014 Bernice invested 80,000 in FIA. She was age 65 and in good health. She is now age 72 and her health has started to deteriorate over the last couple of years and she now has angina and had a coronary artery bypass graft. So at the beginning of 2021 she considers how she can maximise her income and is interested to find out what the enhanced annuity market might offer. She is taking a relatively high income that requires a 5.6% RFP ( 5,600), and her latest fund value from her recent annual statement was 67,600. If she converted to fixed income in FIA she would get 4,500 Her transfer value will be worked out based on her lower life expectancy. A 285 administration charge will be deducted to cover the cost of the work involved. Her final transfer value is 59,900. Bernice shops around and ABC Life offer her an enhanced (fixed) annuity of 4,670 taking into account her current health status and after paying an advice fee (less than what she was getting within FIA but more than the fixed income available). She decides to stay with Retirement Advantage as she is willing to accept a degree of investment risk. 6

7 Get in touch If you have any questions or would like more information, please get in touch with our sales team. Call us on us at Visit our website We can produce this document in an alternative format on request in Braille, large print or on audiotape. We can also produce it in other languages. Telephone calls may be recorded for training and quality monitoring purposes. Retirement Advantage is a trading name of MGM Advantage Life Limited. Registered no Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Retirement Advantage and the Retirement Advantage logo are trademarks of MGM Advantage Holdings Limited. Registered in England and Wales. Registered office MGM House, Heene Road, Worthing, West Sussex, BN11 3AT /15