Type: Purchased life annuity
Minimum investment: Lump sum £50,000
Minimum age: 18
Income frequency: Annually
Investment choice: Cautious funds – LT Henderson strategic bond, LT Invesco Perpetual monthly income plus, LT JPM cautious total return, balanced funds – LT Gartmore cautious managed, LT Jupiter Merlin balanced portfolio, LT New star managed distribution, growth funds – LT HSBC FTSE 250 index fund, LT M&G global leaders fund, LT Newton managed fund
Charges: Initial up to 5%, annual 1.7-1.95%
Fund switches: Up to three free fund swcthes a year, thereafter £25
Commission: Initial 3%, renewal 0.5% for 10 years, thereafter 0.25% renewal
Tel: 0845 051 8351
This plan is technically a deferred temporary purchased life annuity which will provide an annual income for a maximum of 21 annual payments on the life assured reaching a pre-chosen age, either 75 or 80.
IPFM director Luke Gibbon observes that the policyholder chooses at the outset the age that the income is to start, but it must be at least 10 years after the start date of the policy. “The plan looks like an offshore bond in that the investor may select from nine available funds, covering the range of risks.”
Gibbon points out that the policy has the potential to grow not only from the performance of the selected funds but also from the addition of birthday units. “These units are effectively the distribution of funds released on the death of other investors. In the event of death before drawing the income, the initial investment is returned to the estate and any growth is retained by the fund to be distributed. If death occurs after the income payments have started, the original investment less the income already paid to the estate will be paid,” he says.
In Gibbon’s view, this plan will be beneficial for policyholders who live longer than average. “I have made a calculation based on the example in Life Trust’s brochure. This is based on an investment at age 50 assuming a growth rate of 7 per cent a year, annual charges of 1.75 per cent and income at age 75. If the investor lives beyond age 90, then the plan is likely to be more advantageous than an offshore bond. If the investor survives to age 95 the returns are very good. The drawback is that the returns prior to age 90 are less than an offshore bond and the difference can be significant,” he says.
Gibbon feels the product is very different from anything else on the market and could be attractive as part of a persons overall investment plan.
However, Gibbon has a number of reservations about the product. “The plan clearly favours those with a long life expectancy but will this lead to selection against the insurer? If so, how has this been factored in? In the event of death only the initial investment will be repaid unless the income already withdrawn is higher. Will this be acceptable to clients?”
In Gibbon’s experience, clients approaching retirement are primarily concerned about the first 10 years income and not the subsequent years. He wonders if this will make it more difficult for them to take on board the concepts of this plan.
“This could fit nicely is at the point of taking retirement benefits and planning for potential spouses benefits. Providing a spouse’s pension significantly reduces the initial pension payable. This plan could be used where part of the tax-free cash is invested for the spouse whilst the annuity is guaranteed for 10 years.
“It is likely that the gap until the fund pays out will be largely covered, in the event of the death of the spouse. The plan will then provide a high and rising income. Also if the spouse dies in the interim at least the capital will be returned,” he says.
Scanning the market for potential competitors Gibbon says: “There is no competition at present. As the idea is innovative, it is very difficult to draw a conclusion. My initial reaction was that it would not be attractive to my clients however on further reflection I think there could be a limited number of scenarios where it could play a role in planning.
“Overall, my instinct tells me that most clients would not accept the risk that the investment will provide a poor return in the event of death before the average age.”
Suitability to market: Average