THE HOME OF THE PROFESSIONAL ADVISER PREPARING BUSINESS OWNERS FOR PENSION REFORM GRAEME CARMICHAEL BUSINESS DEVELOPMENT MANAGER For adviser use only – not approved for use with clients

LEARNING OUTCOMES To be able to demonstrate an understanding of: The likely future use of traditional retirement solutions The options available for appropriate advice considerations when approaching retirement flexibility The creation and maintenance of sustainable incomes in retirement The advice opportunities for adviser businesses in the current retirement market

AGENDA Budget Changes New World Choices Planning Parameters Longevity Issues Regulatory Aspects Case Study Planning With Pension Reform

BUDGET MARCH 2014 “Mr Deputy Speaker, what I am proposing is the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.” George Osborne, Chancellor Your business may not be your pension…

Client Perspective Being profitable to retirement Surviving to retirement Adviser’s Perspective Auto Enrolment commitments Personal planning and preparation Business owners owe it to themselves to ensure they are in a position to take advantage of pension reform Opportunities may appeal to their entrepreneurial background Will need to be done in the hands of a professional adviser How do you ensure your value exceeds their cost? BUSINESS OWNER’S PRIORITIES PRIOR TO RETIREMENT?

FREEDOM AND CHOICE – WHERE ARE WE NOW…? Flexi-Access Drawdown Uncrystallised Fund Pension Lump Sum Guidance DB Transfers Other aspects No MPAA if cash only All new ID from April 2015 Capped continues Easier to administer than drawdown? Tax treatment cash/income MPAA Impartiality, access and costs? MAS and TPAS Funded and private schemes ok Advice opportunity? NRA link to SPA at 57 from 2028 Pension death benefits tax New annuity flexibilities

NEW WORLD CHOICES

WHAT WILL PEOPLE DO WITH THEIR PENSION POT? PROPERTY?CARS?HOLIDAYS? RETIREMENT INCOME?

vs Source: Challenger Retirement income Research 2012 Property 32% Car 19% Debt 12% Annuity 4% buy annuities 80%

PLANNING PARAMETERS For adviser use only – not approved for use with clients

THE NEW GAME FOR ALL – CONNECT FOUR YIELD Fund Term Income

THE RISK OF RETIREMENT RUIN WHEN DOES THE MONEY RUN OUT? Sources: PCMA00/PCFA00 with 100% of medium cohort improvements Moshe A Milevsky Feb 2006 Income = 5% of starting pot Increasing at 3.5% pa 7% pa returns after charges No cap or reviews % loss in year 1 89

LONGEVITY ISSUES… For adviser use only – not approved for use with clients

EXPECTANCY OF LIFE EXPECTANCY… Source: O’Brian, Fenn, and Diacon, 2003, self-estimated life expectancy compared with GAD forecast life expectancy

DISTRIBUTION OF DEATHS: MALES OVER 60 IN Average Age of Death <83 = 49.7%>83 = 46.1% 83 = 4.2% Source: ONS 60110

REGULATORY ASPECTS For adviser use only – not approved for use with clients

GUIDANCE 4.29 From April 2015 there will be no requirement for consumers to ensure that the funds in their pension last for the rest of their life. However, we believe it is important for consumers to understand the impact of making withdrawals over time on their remaining savings and their ability to go on making withdrawals Current rules on income withdrawal address sustainability over time.

COBS CHANGES-SUITABILITY 3 Worse Rates? 2 Insufficient growth 4 Unsustainable income 1 Capital erosion 5 There may be tax implications

FCA POSITIVE COMPLIANCE – DRAWDOWN SUMMARY Drawdown can be Extremely Useful For the right client Consider TFC Requirements Consider Income Requirements Consider all other Options Ensure Systems are Effective Ensure they are Reviewed Regularly Highly Personalise Suitability Reports Failure to confirm Client Objectives Unclear Advice Help Client make an Informed Decision

CASE STUDY For adviser use only – not approved for use with clients

TRADITIONAL RETIREMENT PLANNING… Client Perspective What is the impact of escalation? What is the annuity rate? Future Considerations Impact of spouse’s benefit? Return to support asset-backed or drawdown rate? How do I understand the funding requirements required to achieve my plans? How long will my retirement fund last? What’s the maximum income I can take? What return do I need to maintain my desired income? How do I plan for final lump sum or legacy? How do I plan for planned lump sums in retirement? How does reducing my income in later life impact on estate planning? How do I take account of life expectancy and remaining funds?

Kate 60 English £325,000 pot Wants bridging income Balanced investor Assumptions: Yield 6.05% pa net of provider and ongoing adviser charges. 2% Initial adviser charge

KATE – NO VARIATION IN INCOME Potential problem Source: Prudential Starting income £ 22,974

OBJECTIVES… Retain flexibility Inflation protection Holiday of a lifetime/replace car Maximise death benefits Bridging income

KATE – BRIDGING INCOME Source: Prudential Starting income £ 12,000

KATE – BRIDGING INCOME Source: Prudential Rising to £24,000

KATE – ESCALATING INCOME 2% Source: Prudential Starting income £20,000

KATE – LUMP SUMS Source: Prudential Starting income £18,400

KATE – WITH VARIED INCOME STREAM? Source: Prudential Slowing downState Pension Starting income £23,920

Handset Question How much demand do you expect from your clients for retirement income modelling advice? 1.Something we already provide 2.Something that will need to be increasingly incorporated into client support 3.No particular demand from our clients

SUPPORTING YOUR DISCUSSIONS

SUMMARY Pension Reform will create significant advice opportunities with business owning clients Pension provision outside of business assets will continue to be vital Professional advice is necessary to support the extraction of value created by the Chancellor

LEARNING OUTCOMES To be able to demonstrate an understanding of: The likely future use of traditional retirement solutions The options available for appropriate advice considerations when approaching retirement flexibility The creation and maintenance of sustainable incomes in retirement The advice opportunities for adviser businesses in the current retirement market

IMPORTANT INFORMATION Please bear in mind that, where applicable, taxation, legislation and HMRC practice are all liable to change. No reproduction, copy, transmission or amendment of this presentation may be made without written permission from Prudential.