THE HOME OF THE

PROFESSIONAL ADVISERPREPARING BUSINESS OWNERS FOR PENSION REFORM

GRAEME CARMICHAELBUSINESS 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

PlanningWith

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

Property32%

Car19%

Debt12%

Annuity4%

buy annuities80%

PLANNING PARAMETERS

For adviser use only – not approved for use with clients

THE NEW GAME FOR ALL – CONNECT FOUR

YIELD

Fund

TermIncome

THE RISK OF RETIREMENT RUIN WHEN DOES THE MONEY RUN OUT?

65 75 90

Sources: www.actuaries.org.uk: 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

70 80 85

8680

20% 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 2010

83Average Age of Death

<83 = 49.7% >83 = 46.1%

83 = 4.2%

Source: ONS

60 110

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 withdrawalsCurrent 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

RequirementsConsider all other

Options

Ensure Systemsare 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 increasinglyincorporated 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.

www.pruadviser.co.uk