Protecting clients against themselves

This past weekend’s Personal Finance saw a lot of cover given to the dilemma of retirees outliving their retirement savings, particularly those making use of living annuities.

Old Mutual launched a new Retirement Safety Income Plan (Safety Plan), which aims to ease the dilemma that clients often face in choosing between a Living Annuity or a Life/Guaranteed Annuity. This product, together with Discovery Invest’s Guaranteed Escalator Annuity, appears in our Investment rates from today.

The need for the product is underpinned by the large number of baby-boomers now nearing retirement, and the new regulatory environment emerging around National Retirement Reform.

The product is likely to be suitable to a wide range of clients due to the volatility of investment markets, which means that even with low, “safe” income levels, there is still a significant chance that the client will outlive their market-linked income. And research has shown us that clients are, on average, taking higher income draw downs than they should when we consider the market’s consensus expectations of future returns.

Ursula Torr, Product Marketing Manager at Old Mutual says the Safety Plan is essentially a new generation hybrid annuity – it combines the flexibility of a living annuity and the security of a conventional guaranteed annuity.

“Safety Plan uses the newly revamped Fairbairn Capital Income Objectives Assessor to gauge the client’s investment risk and establish their attitudes toward that risk. This is reached by firstly, examining the client’s need to take on risk and their ability to do so financially. Secondly, the client’s personal attitude toward risk is determined – this is their ability to tolerate volatility and downside risk. Integrating the client’s true risk profile into the Safety Plan portfolio, in addition to the risk management framework integral to the Safety Plan product design, means that a client generating a sustainable income for life has a guarantee despite markets disappointing in the living annuity and there will be an escalating Safe Income as a back-up.

Safety Plan consists of two phases, an initial Living Annuity and, where required, an Escalating Guaranteed Annuity; the latter will only be instituted if the living annuity breaks down and once the client has been notified.

“Safety Plan has client features that lock positive growth during the Living Annuity phase into the guaranteed underpin, establishing a safety-net that ensures safe levels of income for the client’s lifetime. It also provides some structure for recommended draw-down levels.

“We believe that the product will serve to enhance not only our current set of client solutions in the retirement space, but also the advice process. Given the current environment and market conditions, the product will be suitable for a wide range of clients.”

Torr adds that Safety Plan provides a pragmatic combination of a living annuity’s flexibility (through fund choice, market performance and leaving a legacy), with the security of a guaranteed annuity if that’s required. It also has safety features that protect the client if the markets work against them.

“The product functions within an advice framework, following a guided approach to income management, so the broker’s understanding of the client’s needs remains crucial. Caution should not require a client to unnecessarily forego returns, and Safety Plan enables clients to find a balance between risk and security. ”

Safety Plan is best suited to managed clients who are financially conservative, who are disciplined and manage their income draw-downs as best they can, without aiming for very high or low draw-downs, and who want to insure away market risk.

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