'Easing an old age problem'

Evening Standard, 9th January 2008, by Anthony Hilton.

'One of the major problems with old age is that pensions rarely keep pace with inflation, savings gradually run out and the older people get, the more they decline into poverty, genteel or otherwise.

It has always been like this - it is reckoned that of the 11 million people currently retired in the UK, a third are outliving their finances - but with people living much longer, it could get a lot worse. From today, however, there is a solution, or at least an insurance policy that could mitigate the worst effects of increasing age coupled with declining income.

New company Life Trust, which has powerful backers in Royal Bank of Scotland, JPMorgan and D. E. Shaw, has devised a product where the payouts increase the older you get. The company has not gone completely mad, however, for there are some rules. You have to be at least 75 when you begin to draw on the income, and the maximum length of the policy is 20 years. But if you really think you will live beyond 95, you can start the policy a bit later, or presumably take out a second one staggered to start when you are 80.

Though the mathematics behind the Longevity Income Plan are quite complex, the concept is simple. First, the customer invests a lump sum at least 10 years before the age when drawdown is planned to start. This is invested in a range of funds with the usual choice of aggressive growth, middle of the road or safe but boring, the aim being to bulk up the capital pot ready for the drawdown.

The trick of increasing payments is based on the fact that the insurance company will have a lot of customers in the plan, and a predictable number will die each year. With an annuity, when this happens the insurance company hangs on to all the unused capital. With this plan, a proportion of the deceased's money is redistributed among survivors, so that it is possible each birthday to give them a bit more.'