The scrapping of the age 75 annuitisation rule could inadvertently encourage people to stay in drawdown for longer than is suitable and mean they risk missing out on the benefits of mortality cross-subsidy, warns MGM Advantage, specialists in retirement income and Intelligent Pensions, the pensions and retirement specialists for IFAs. For a 70 year old male living for 20 years with a pension fund worth £100,000, this could mean missing out on over £70,000.
Mortality cross-subsidy is the process of pooling the funds of annuity policyholders who have died earlier than expected and sharing these among remaining customers. You don’t get mortality cross-subsidy with income drawdown. At MGM Advantage the mortality cross-subsidy is awarded in the form of a Lifetime Bonus.
Indeed, analysis of MGM Advantage’s own investment-backed annuity, the Flexible Income Annuity, shows how a 60 year old male with a £100,000 invested in exactly the same funds as an equivalent income drawdown product, and living for 20 years would receive an additional Lifetime Bonus of £27,200, whilst a 70 year old male would receive £75,900 over the same time period.
|Age annuity is purchased||Years 1-5||Years 6-10||Years 11-15||Years 16-20||TOTAL over 20 Years|
Chart one: 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).
Aston Goodey, Sales and Marketing Director at MGM Advantage comments, “There is a huge danger that now people aren’t legally obliged to purchase an annuity at age 75, they will drift along in drawdown without fully understanding the progressive nature of its risk.
“Drawdown becomes less suitable over time, as beyond age 75 the ability to deliver consistent investment returns that will compensate for the absence of mortality cross-subsidy, become increasingly unrealistic. This coupled with rising inflation, highlights how unsuitable drawdown is as a long-term solution for some people.”
Andrew Pennie, Marketing Director, Intelligent Pensions adds, “The decade that stretches from age 70 to age 80 is the best time frame for the majority of clients to implement their exit strategy from drawdown, some starting sooner than others depending on their specific priorities and financial circumstances.
“Many drawdown investors have an appetite for some investment risk and we believe the MGM Flexible Income Annuity offers an excellent stepping stone away from drawdown, as part of a phased exit strategy. As a lifetime annuity It delivers mortality cross-subsidy with the security of a guaranteed minimum income, the benefit of low fund management charges and the potential for member bonuses.”
The MGM Advantage Flexible Income Annuity gives customers the potential to receive a greater income than through a fixed level conventional annuity. The product, which has just celebrated its 1st anniversary, includes the flexibility to change income levels at different stages of retirement and the potential for growth and therefore the potential to act as a natural hedge against the impact of inflation. It also provides a minimum income guarantee and death benefits.
The flexibility of the product and the fact that the minimum investment is £10,000 means it’s suitable for the majority of UK consumers who are willing to accept an element of investment risk on some of their pension savings, providing they have a minimum income guarantee to rely on. Low annual management charges and a simple range of investment funds to choose from will make the product attractive to a previously poorly-served group of retirees.
Source : MGM Advantage Press Release