For financial advisers only – not for retail clients Enhanced Annuities Underpinning your Pensions Platform

By attending this session, advisers will be able to: – Examine the detail behind the Treasury’s view of annuities – Discuss the comparative tax and sustainability issues of ‘taking the cash’ – Understand the impact on the wider use of annuities outside of ‘individual pensions’ – Consider how underwriting for income can establish an efficient underpin for your platform Learning Objectives

Freedom! From April 2015 the 320,000 people that retire each year with defined contribution pensions will have complete choice over how they access their pension

The need for advice

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

Journey through retirement

UK Consumer research Having sufficient income to enjoy retirement62% Meeting my basic costs43% Paying for unexpected expenses38% Paying for care in later life34% Stretching my retirement savings so I have sufficient income for the remainder of my life 33% What are you worried about in retirement? Partnership, April 2014 consumer research. Sample - 2,006 people between the ages of 45 to 70 years old 64% wanted a guarantee of an income payable for life

Full insurance against the risk of outliving your savings For many they remain the best method of ensuring a secure income in retirement A guaranteed income for life Impaired life or enhanced annuities grown in popularity over the past 5 years The policy holder does not bear any investment risk Provides certainty and security for individuals Freedom and Choice includes annuities

The annual rate of income will be allowed to go down as well as up – (no detail of any restrictions on amounts) Retains £40,000 money purchase annual allowance if annuity only Freedom and Choice includes annuities Product 1Product 2MPAA Annuity£40k Annuity FAD with income Annuity Pre 4/15 capped drawdown Annuity Pre 4/15 capped, but now >150% GAD Annuity UFPLS (excluding small pots)

The annual rate of income will be allowed to go down as well as up – (no detail of any restrictions on amounts) Retains £40,000 money purchase annual allowance if annuity only Allow lump sums to be taken – Must be specified at point of purchase – More clarification needed There is no limit on the maximum guarantee period that can be offered Commutation of guaranteed payments on death under £30,000 Freedom and Choice includes annuities

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

“Based on your gender, based on your age, perhaps asking one or two basic questions like whether you've smoked or not you can tell somebody that they might, on average, live for another 20 years or so” S Webb Men aged 65 today will on average live to 86.5* BUT 22% of them will see their 95th birthday*. Life expectancy “If all men budgeted on the basis that they will be dead by 87, a lot of them would run out of money.” D Robbins, Towers Watson *bbc.co.uk 17/4/14

Measuring the value of annuities 2

Source: Government Actuaries Dept, 2008 UK Cohort Life Expectancy data, age at 2011 Age years = years = 92.5 Age yrs = yrs = 94.9 Age yrs = yrs = 98.2 The longevity challenge

The Dangers of DIY

£75,000 (after PCLS) withdrawal in 2015/6 Tax may be subject to change in the future and depends on individual circumstances. *2014/5 BSP +3% Full Basic State Pension 2015/16 £6,058* Withdrawal £75,000 Total income £81,058 Less personal allowance £10,500 Total Taxable income£70,558 Taxable 20% (0-£31,785) £6,357 Taxable 40% (£31,785* - £70,558)£15,509 Tax £21,866 Net income from pension fund £53,134

£53,134 starting point. 4% net return, based on complete year’s income Note: in year 1, there could be significantly more tax to pay due to the withdrawal of pension funds Annuity quote: Partnership, September 2014, based on 65 year old diabetic who has high blood pressure and is obese. Fund is £75,000 after PCLS Comparison with 4% net growth (non-pension) Tax may be subject to change in the future and depends on individual circumstances. Capital decreases as growth insufficient to match equivalent annuity

What if it was 60% equity? Source: The Economist 29/3/14. The chart shows how many years a pension pot will last (on plausible rates of return for various levels of income.) Rate of annual withdrawal

World view The outlook for DC members around the world is not bright. The most obvious risk to DC members is running out of money. “ Conversion into adequate and sustainable retirement incomes remains a largely unresolved problem in many countries ” Source: Mercer 2013

“..Colleagues in US…grappling with the issue of income and outcome.” – Nico Aspinall, Towers Watson “Only 19 per cent of scheme members in the US make a withdrawal from their DC retirement pots in the first five years of retirement, as they are trying to figure out their retirement lifestyle”. – Fredrik Axsater, State Street Global Advisors Has it worked elsewhere? “They look at our annuity market with envy” Nico Aspinall, Towers Watson

“In Switzerland, where unlimited access to private pension saving is allowed and annuity rates are seen as good value, around 80% of DC savings are still put into lifetime annuities at retirement”. “And in Denmark….around 85% of voluntary pension savings are being allocated to either lifetime or fixed-term annuities”. Has it worked elsewhere? Mel Duffield, PPI Deputy Director,

What David Murray’s financial system inquiry means to you and your business Has it worked elsewhere? The inquiry wants to explore whether rules should be introduced to encourage retirees to buy retirement income products, introduce a default ‘investments’ option for retirees or mandate the use of certain retirement income products such as annuities. brw.com.au 16 th July 2014

OECD comment “The main OECD recommendation is that governments should recommend a combination of drawdown and annuities to overcome the risk of you outliving your resources”. ……a widespread reduction in annuitisation goes against its policy recommendations. OECD flags budget reform threat to longevity risk Money Marketing 26 June 2014

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

The need for advice LAM8O 1

Underpinning income – conceptual model Income requirement

How much do you need for an underpin? What are the fixed costs? How much income is already guaranteed? What is the shortfall? Personal details? Fund available?

How much do you need for an underpin? What are the fixed costs? How much income is already guaranteed? What is the shortfall? Personal details? Fund available?

How much does the guarantee cost? £101,029 Guaranteed £3,000 pa Full flexibility Fund Choice £48,971 *Source: best rates AMS portal and Partnership April Based on 65 year old, who has diabetes, is overweight, HBP and retinopathy. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. No escalation Using standard rate

£39,640 £110,360 c9% ‘fund growth’! How much does the guarantee cost? Guaranteed £3,000 pa Full flexibility Fund Choice *Source: best rates AMS portal and Partnership April Based on 65 year old, who has diabetes, is overweight, HBP and retinopathy. Figures show best available income. Single life. Payable monthly in advance. No guarantee period. No escalation Using enhanced rate

Unfunded Public Sector schemes No accumulation ‘pot’ CETV – DC pot currently ‘not likely to be taken out’ by many DB members – But attractiveness may increase! Public sector largely ‘unfunded’ CETV = upfront cost to the Exchequer – Recouped from taxpayers and remaining members Legislation to remove the option to transfer from an unfunded public service defined benefit scheme to a defined contribution scheme, except in very limited circumstances Defining the benefit for employers

Private Sector: original proposals: 1.Ban DB-DC except in exceptional cases 2.Ring-fence transfers from DB outside of new rules 3.Cap the amount available for transfer 4.Transfers out subject to DB trustees’ approval 5.Leave existing allowance in place, if no risk to economy Defining the benefit for employers Over 85% of respondents were in favour of retaining the right to transfer

Defined Benefits – Safeguards 1. Individual must take advice before a transfer can be accepted - Professional adviser - Independent from the defined benefit scheme 2. Guidance given to trustees on the use of existing powers - Delays - Scheme funding levels FCA handbook: With defined benefit transfers a firm ‘should start by assuming that a transfer or opt-out will not be suitable’.* *FCA: COBS

DB scheme population often weighted towards retirees ‘Freedom and Choice’ confirms individual retirees cannot transfer out of Defined Benefit Schemes BUT schemes can de-risk by annuitising the benefit Enhanced rates reduce the cost Enhanced DB de-risking is a huge opportunity The relevance of underwriting

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

Journey through retirement

Take Care with your Pension..allowing people to have more flexibility over when and how they take income from their retirement products could help them better plan for their care. HM Treasury March 2014

Pension savers to be shielded from higher care costs “People who cash in their pensions under the new government reforms will be protected from paying more for their care” Daily Telegraph 2/4/14 Take Care with your Pension

Government looking at notional income rules Consistency between drawdown products and annuities Changes before new ‘care support and charging rules’ in October Social care will be covered by the guidance service Take Care with your Pension “Those who…draw down their full pension pot quickly….need to consider how this will effect their current and future entitlement to welfare and social care support”. Freedom and Choice in Pensions - Response to consultation, July 2014

Guarantees – who needs them? Live long and prosper Underpinning your income Later Life The Future Agenda

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” The wind of change

Fundamental knowledge: longevity and underwriting expertise Annuity Market continues to create uncertainty Opportunities identified to build a stronger and more diversified business Care annuities unaffected Protection sales unaffected Defined Benefits - massive potential for building on scheme de-risking What does it mean for us?

Your clients will need you more than ever The environment is going to change frequently and unpredictably Plans tested against downside scenarios will avoid ruinous outcomes But: they will still need regular reviews Growth areas…Retirement and Later Life What does it mean for you?

By attending this session, advisers will be able to: – Examine the detail behind the Treasury’s view of annuities – Discuss the comparative tax and sustainability issues of ‘taking the cash’ – Understand the impact on the wider use of annuities outside of ‘individual pensions’ – Consider how underwriting for income can establish an efficient underpin for your platform Learning Objectives

Thank you Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No ), and Partnership Home Loans Limited (registered in England and Wales No ). Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is 5 th Floor, 110 Bishopsgate, London EC2M 4AY