Financial Planning Through Retirement Prudential and AIFA in Partnership SimplyBiz January 2010 John Bendall Dip PFS Business Development Manager

Agenda AIFA ‘Financial Planning through Retirement’ Study Risks in Retirement Planning Asset backed annuities Client case study Exit strategies for drawdown Questions

‘Financial Planning through Retirement’ led by AIFA and sponsored by Prudential Links demographic and public policy drivers to market offerings Consumer perspective Provides direction on how advisers deliver informed professional advice in this fast changing market Editorial board, constructed of respected individuals, practioners and supported by Watson Wyatt Introduction The resulting output has been a white paper that sought to: Review the retirement and advice landscape in the UK Analyse consumer needs pre and at retirement, now and in the future Assess current and propose new solutions where there are identified gaps between consumer need and industry provision Good practice notes (For advisers)

Participating Organisations Association of British insurers Investment Managers Association SHIP Society of Later Life Advisers SVARfair FSA HMT PADA The Pensions Regulator Resolution Foundation Rowntree Foundation Pensions Institute Pensions Policy Institute University of East Anglia Age Concern Help the Aged Baigrie Davies J P Morgan Just retirement Legal & General Prudential Lighthouse Group Money Portal Sesame SimplyBiz AWD Buckles Hargreaves Lansdown Origen AON Watson Wyatt Aegon Watson Wyatt predicts the UK ‘at-retirement’ market for financial products will grow by over 60 per cent during the next five years to £23.1 Billion

AIFA Landmark survey Executive summary 7-9 Million people not saving enough for Retirement Savings gap £57 Billion Average DC pension pot £15,000 generating a meagre £ per year Develop glossary of terms for the industry, will help consumer understanding Move this language into’ illustrations’ for customers Responsibility is moving onto the INDIVIDUAL Planning for retirement Auto-enrolment will help Advice through employer should be better incentivised People will look to use ‘alternative asset’s to generate income Concerns that RDR may reduce the number of advisers in the market Recognition that decumulation is becoming a market in itself Additional guidance to advisers Other adviser sessions across the country

Consumer issues Attitude to risk - Inflation - Investment - Interest rate - Longevity/ Early Death or Living too long….., Desire to retire early but reality might mean working longer or phased retirement With State Pension age increasing, how can you make your pension savings work harder? So what are the ISSUES?

Drawdown Launched 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 01/05/9001/05/9101/05/9201/05/9301/05/9401/05/9501/05/9601/05/9701/05/9801/05/9901/05/0001/05/0101/05/0201/05/0301/05/0401/05/0501/05/0601/05/0701/05/0801/05/09 Annuity rates: £100k Annuity Rate male 65, guaranteed 5 years as income, monthly in advance Gilt yields: Bank of England UK instantaneous nominal forward curve, Maturity years 19 Data up to the 31/12/2009 Inflation 3% Inflation 3.0% Inflation 3% Annuities (left hand scale) Gilt yields (left hand scale) FTSE 100 (right hand scale) Market history FUTURE? No Crystal Balls However you need to be prepared whatever the outcome? RETHINKING RETIREMENT

14% 1 in 3 will live to age 90 25% Distribution of deaths: Male 65 Source: Prudential calculations in 2009 using PCxA00 with medium cohort improvements ANNS % Customers do not understand their own Longevity risks

Insert client post code LL20 7NT

Inflation risks Average pensioner inflation reached 5.4% in January 09‚ significantly higher than the 0.5% rate average rate for non-pensioners Source Age Concern Annual Inflation 5 years 10 years 15 years 25 years PURCHASING POWER OF LEVEL INITIAL INCOME OF £ %£821£675£555£ %£747£558£417£233 Could you afford to live on 50% of your income in 12 years time?

Retirement Solutions – high level pros and cons ProductAdvantagesDisadvantages Conventional annuityGuaranteed, simple, various options Risk of inflation if level, no potential for growth, lack of flexibility Income DrawdownFlexible, Potential for growth, death benefits Lack of guarantee, high withdrawals can deplete fund, unattractive to many after 75 Guaranteed drawdown (variable annuity) Potential for growth, death benefits, income guarantee Cost, often less flexible than drawdown, guarantee not always attractive Asset backed annuity Potential for growth, includes mortality gain, often provide guarantee of income Less flexible than drawdown, investment risk, annuity style death benefits Scheme Pension Potentially high withdrawals from fund, potential for growth, attractive for those with larger funds Expensive, potential to run out of fund, not attractive for smaller funds

Three phases of retirement Retirement can be divided into three distinct phases each with different income and expenditure needs Source: AIFA Prudential Income needs in retirement U shaped annuities

What’s the asset allocation of the fund? With-Profit Fund Asset Allocation as at 30/06/2009 Prudential with-profits 2009 With-Profit Fund Asset Allocation as at 31/12/2008 What our long term growth expectations look like? What’s the asset allocation of the fund? With-Profit Fund Asset Allocation as at 30/06/2009 Cash Increasing risks and potential returns Conventional annuity assets

A Required Smoothed Return of 6% If actual Smoothed Return > 6%, customer income will increase If actual Smoothed Return < 6%, customer income will fall Higher Starting Income Lower Potential Growth Higher Potential Growth Lower Starting Income Income from an Income Choice Annuity depends on the relationship between the Required Smoothed Return for the income chosen by the customer and the actual Smoothed Return we declare for the annuity A Required Smoothed Return of 1% If actual Smoothed Return > 1%, customer income will increase If actual Smoothed Return < 1%, customer income will fall Income driven by investment return

Case Study Mr Example Male 65 ( Retiring local Gov employee) Plus max state benefits Final Salary Scheme £10,000 indexed linked In addition to his Final salary scheme Mr has £ pension pot in a Personal Pension from a previous employment He has an income shortfall of approximately £7,000 His attitude to risk is cautious Small amount of other savings in cash assets £25,000 Source Prudential

Retirement income options (£100,000) Conventional Annuity RPI annuity£3,921 3% £4,478 Level annuity £6,405 Income Choice Annuity Max£7,909 6% Required return Min£4,623 1% Required return Income required £7,000 would need a Required Return of 4.63% Income Choice Annuity can give a hedge against inflation from the investment returns without the fall in initial income on day one. Comparing Drawdown Critical Yield B, £7,000 income would be 7.1% RSR to match annuity 3.77% Source Prudential

Source Prudential ICA Demo Jan 2010

Flexible remuneration – fee model Total Pension Pot after tax free cash taken Number of pots to be transferred £ ,000£?£?£? ,000 £? X , , , , k+ By Negotiation

Commission 6% Investment Return Nil N/A£4, £1200 £4, % Investment Return £2, £2, Impact of commission shapes (£60,000 case) £2, Commission Shape Income changes 3.5% Initial Plus 0.5% 2% Initial 3.5% Initial £4, £2,548.65£4, £2,100 £2,100 Initial Commission £ Annual Drop in Income £ Example based on £60,000 premium, male, aged 65, single life, payment monthly in arrears, 5 years guarantee period, 1.3% commission conventional rate Extra £900 up front cost to income £49!

Rethinking retirement Product innovation in the ‘middle market’ Potential to have Higher initial Income Ability to alter income levels every 2 years Annual remuneration options Income guarantees A low initial premium of only £10k Enhanced De risking Drawdown

Options initiative 51 Days Days Av Q1 09

One winning claim of annuity misselling could open the floodgates for Advisers No legal challenges to annuity sales One claim could open the floodgates Trustees risks Occupational DC schemes Health and lifestyle issue Developing UK Market Example 10K compensation Could make claim chasers interested? Personal Pensions Different legal arguments Source: Money Marketing 26 th November 2009

Annuity income comparisons AgeConventionalICA 6%Drawdown Source: Prudential, Jan 2010 (WPA DEMO 4.25% ) Maximum Starting Incomes £100,000, single life, No Guarantees 605,8937,2247, ,5387,9098, ,5088,8919, ,96410,389£5,445 – £8,910 1) Clients with younger spouses 2) Gifting to Charity

Third Way Developments Summary AIFA Prudential landmark survey will be repeated each year Many issues for Advisers, Clients and Trustees Use AIFA best practise notes to test against your own business What is your exit strategy for Drawdown? Blending can reduce risk Retirement Planning Growing and very attractive market – make sure your proposition is right! Guaranteed Drawdown Enhanced Annuities Asset Backed Annuities Exit Strategies For Drawdown Unit Linked Annuities Conventional Annuities

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Important information “Prudential" is a trading name of The Prudential Assurance Company Limited, of Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. The Prudential Assurance Company Limited and Prudential Annuities Limited are registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered numbers and respectively. Prudential Retirement Income Limited is registered in Scotland. Registered Office at Stirling FK9 4UE. Registered number SCO Authorised and regulated by the Financial Services Authority. This presentation contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding of current taxation, legislation and HMRC practice, all of which are liable to change. No reproduction, copy, transmission or amendment of this presentation maybe made without the written permission from Prudential