Suitable Retirement Solutions

New Model Adviser Conference14th/15th January 2010

Nick CooperPensions Proposition ManagerZurich Assurance Limited

For intermediary use only – not for use with your clients

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Agenda

Size and demographicsRegulatory issuesAnnuity: known / unknownsUnsecured PensionsA third way?Alternative Secured Pension (ASP)

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Size and Demographics

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Big market, getting bigger

Product providers and financial advisers will be presented with considerable opportunities from the ‘at-retirement’ market in the next five years, Watson Wyatt predicts.

UK ‘at-retirement’ market for financial products will grow by over 60% to £23.1bn during the next five years.

Increasing number of people coming up to retirement in the next five years to ten years and in spite of poor investment markets.

Source: Professional Adviser July 2009

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Regulatory issues

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RU55: Core Knowledge (August 1998)

IFAs shouldUnderstand structure of annuities

Be aware of mortality, underlying investments, cost of optionsBe aware of financial strength issuesBe aware of annuity types

On PFW (Drawdown)Be able to calculate min and max GADUnderstand the need for adviser led annual reviewsUnderstand death benefitsUnderstand the concept of Phased inc. with Drawdown

– Advantages and disadvantagesUnderstand value of SIPP and effect of charges / commission

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RU55: Core Knowledge (August 1998)

IFAs shouldInvestment considerations

Understand need to match investments to needsBe aware of structure of different types of fundsUnderstand Critical Yields and Mortality DragBe aware of client’s wider investments

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RU67: Records needed(June 1999)

Investment objectives; need for PCLS; state of healthIncome requirements; existing pension assetsRelative importance of plan by reference to financial circumstancesATR (some instances of inconsistencies with assets noted)

PIA wishes firms to be in no doubt that failure to comply with record keeping Rules may, in itself, give rise to disciplinary action

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Annuity: Known Unknowns

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Lifetime Annuity Advantages: Knowns

Known incomeKnown, or inflation-linked, increasesKnown spouses pension / death benefitsPayable throughout (joint) lifetime(s)Safe/ secureNo investment risk (unless specifically investment-linked)

BUT…..40% of 55-64 year olds find buying an annuity unacceptable

Source: Marketing Sciences Ltd. – February 2007

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Lifetime Annuity Options

PP=£200,000, Male 60, Spouse 3YY

Lifetime annuity basis

Yearly amount . payable m.i.a.

Contingencies“Cost”

Single life pension, non-guaranteed, non-increasing

£12564

Single Life pension, 5 year guarantee, non-increasing

£12540 0.2%

Joint-life pension with 2/3rds WDAR, guaranteed 5 years, non-increasing

£11256 10.4%

Single life pension, guaranteed 5 years, RPI increases

£7368 41.4%

Joint-life pension with 2/3rds WDAR, guaranteed 5 years, RPI increases

£5640 55.1%

Source: http://www.fsa.gov.uk/tables/bespoke/Annuities as at 1st October 2009. Non-smoker. Best rate.

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Impaired or Enhanced Annuity?

Up to xx% improvementDependant upon condition

50% of those ineligible at 60, become eligible by 75Significant if choosing USP

PP=£200,000, Male 60, Spouse 3YY

Lifetime annuity basis

Annual amount payable m.i.a.

Improvement

Single life pension, non-guaranteed, non-increasing

£12564

Single Life pension, Smoker, non-increasing

£14364 14%

Source: http://www.fsa.gov.uk/tables/bespoke/Annuities as at 1st October 2009. Best rate

Impaired Annuity

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Unsecured Pension: an attractive option for many?

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Suitability – Income Withdrawal

Ability to take TFC but no incomeClient younger & alternative annuity less attractive Investment term long enough for taking on the investment risk & rewardClient is not dependent on incomeNeeds / wants flexible incomeBelieves annuity rates will riseIll health– Expects health deterioration to enable impaired lifetime

annuity?!!– Care re CTO/IHT position on death in first 2 years Maximise death benefits (needs analysis/clarification)Sophisticated client who understands riskHas Investments outside pension arrangement & therefore diversification / sophisticationFund large enough to absorb administration cost

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Small Firms web-pages from FSA

What essential information must I know?

The customer's personal and financial circumstances should be considered carefully, in particular:

the customer's investment objectives current and future income requirements

– existing pension assets

– relative importance of the plan, given the customer's financial circumstances

attitude to risk

– ensuring that any difference between their attitude to riskPFW vs other investments explained

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Small Firms web pages from FSA:Identifying Risk

Ascertain ATRCritical for in assessing suitability and making an investment recommendation.

Explain in terms that a particular customer can understandCustomers with less experience or knowledge of investments– need a detailed and clear explanation of inherent risk with

recommendations being madeIndividual customers may have different appetites for risk at different times in their life

need to be mindful of the fact that the customer's risk appetite may change over time

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Small Firms web-pages from FSA:Asset Allocation Tools

CoB Rules require firms to ensure customers understand riskSome firms find the use of such tools helpfulEnsure use is adequately recorded on the customer file

– Remember, it remains your responsibility to ensure customers have appropriate level of understanding

Can assist advisers in helping the customer visualise the level of investment risk they are prepared to accept By way of policy, FSA do not approve or endorse such tools

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FSA Small Firms web-site:Unsecured Pension - Short Term Annuity

Part of USP can be used to buy a short term annuity To qualify as a short term annuity it:

can run no longer than five yearsmust not extend past the member's 75th birthdaymust be paid at least annuallyIncome can vary in the same way as a lifetime annuity

A short term annuity may be guaranteed for full termmember dies after 12 months => income continues for 4 years

Capital guarantees are not permittedIt is possible to take a USP by a mixture

Drawdown and short term annuities

The member can also buy further short term annuities whilst still receiving income from an existing one

Source: FSA Small Firms website

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Advantages / Disadvantages

Not committing whole fundCan wait for lifetime annuity rates to improve

or health to deteriorate!

Not locked in to decision long termCan mix and matchCan protect excess over purchase price on death

Builds in expense at each purchaseRelatively complexSmall market-place

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Isn’t there another way?

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“Third Way”

Guarantee BenefitsIncome, Death, Capital

Inve

stm

ent

Choi

ce

% G

rowth

Loc

ked

in

Frequency

of Lock in

Cost of

Guarantees’

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Advantages / Disadvantages

GuaranteesTake potential pain out of investment?Offer annuity alternative to cautious investor?

ExpensiveComplexPoorly understoodCautious portfolio vs CY

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Third way (a guaranteed income)

In addition to wrapper, what about income, fund and advice charges….

Guaranteed level of income to someone aged 65 is 3.8%Example, only £2,850 a year whereas could have purchased 30—40% more

Every 3 years the fund is reviewed - income will increase by same amount

E.g. Fund ^ 20% income ^ 20%If Fund falls in the three years, income doesn’t fall

As income is taken out each year, the fund falls in valueGrowth has to replace INCOME firstGrowth would also need to replace the charges too – high at 2.1%

2.1% each year + 3.8% (income) + Commission costs (say 0.5%)8% a year growth would match best CPA in 6.5 years

BUT 8% is not really 8%it’s 14.4% ( inc. commission, income and AMC)

For a cautious investor?In a Cautious (Index-tracking) Portfolio?– If not, Suitability must capture investment strategy mis-matchWith the limited fund ranges available?

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Alternative Secured Pension

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Small Firms web-page from FSA

Factors when advising a customer on alternatively secured pensions?Firms and advisers to keep up to date about potential changes in the lawRegard to & warnings for Risks where adverse effect on a client

Whether taking your advice or refraining!

Anyone recommended ASP should have the potential tax consequences explained

Should also be told the Government might remove access to ASPs altogether If evidence is found of continued use to provide capital sums after age 75

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Summary

ATR driven adviceAll options considered

AnnuityUSP (Income Withdrawal or Temp Annuity)Third WayPhased Retirement

Risks explained and covered in Suitability ReportPortfolio construction is keyFunds and cost important

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Thank you for listeningThe tax and legislation information contained in this document is based on Zurich Intermediary

Group current understanding as at November 2009 and may change in the future.HM Revenue and Customs (HMRC) practice and the law relating to taxation are complex and

subject to individual circumstances and changes which cannot be foreseen.

The value of any investment and the income from it can fall as well as rise as a result of market and currency fluctuations and your client may not get back the amount originally invested.Zurich Intermediary Group Limited authorised and regulated by the Financial

Services Authority. Registered in England and Wales under company number 01909111 Registered Office: UK Life Centre, Station Road, Swindon SN1 1EL.

Telephone no. 0500 546 546. We may monitor or record calls to improve service.

For use by professional financial advisers only. No other person should rely on, or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use

with clients.

Important information

2009z 938 (Expiry – 30/4/2010)