'Get rich or die trying'

Investment Week, 4th Feb 2008, by Sarah Griffiths.

'With 9,000 centenarians currently living in Britain and the figure set to rise to 40,000 in 2031, we have never had such great odds of living to a ripe old age. Whereas traditional annuities do not take longevity into account in terms of their payments, a new product by Life Trust, the Longevity Income Plan, allows a plan holder to effectively insure against the risk of outliving their financial resources and to benefit from living longer.

Life expectancy increases by five hours every day, according to Professor Kirkwood of Newcastle University. The number of people over the state pension age is currently 11.3 million, and is projected to reach 12.2 million in 2010. For the first time, the number of pensioners will exceed the number of children in the population. But while few people seem to be planning for a long retirement, over half of people surveyed in a Life Trust NOP survey in 2007 believed their retirement provision will be insufficient for their needs.

Andy Briscoe, CEO of Life Trust, said: "The Longevity Income Plan is designed to provide financial protection against the risk of outliving financial resources in late retirement. We think of it as true insurance for a longer life."
Jason Butler, IFA and partner at Bloomsbury Financial Planning, welcomed the plan as an interesting development that addresses an increasing problem.

So how does it work?

The plan is a single-bond premium. The individual chooses a start date of either 75 or 80, and must invest for a minimum of 10 years previous to the start date. The plan disinvests over a 20-year period, with a potential 21 payments.

"The first amount paid would typically be 8%, which then rises over the 21 potential payments. The last payment is effectively 100% of the fund holding at 95 or 100," explained Mike Tyler, head of strategy at Life Trust.

The Longevity Income Plan has a unique feature called the 'mortality uplift' that will give a rising annual income to plan holders. Every year, the value of the funds made by plan holders who have not survived that year will be redistributed among surviving plan holders, allocated as 'birthday units'.

"In other words, we take what would otherwise be the 'life company's annuity profits' and put it back into the fund for the benefit of surviving plan holders," said Tyler.

Tyler explained that if £50,000 is invested by a 50-year-old male who chooses to start the plan at 80, based on 7% gross investment return and the mortality rate used by the FSA, he would expect to receive a payment of £19,600 at 80, and if he reached 100, a payment of £257,000. Cumulatively, he would receive £1.3m over the 20-year-plan's duration.

"The way the payments are weighted, growing more substantial, offset the ravages of inflation and provide extra money for care costs, which can play an increasing part in old age," he said.

If plan holders die before receiving any payments or the full value of their original investment back in payments from the Life Trust plan, the difference will be paid to the plan holder's estate or trustees.

Dependent on the plan holder's attitude to risk, different investment strategies are on offer in the form of cautious, balanced and growth funds by nine big providers. Plan holders are able to switch investing strategies throughout the duration of the plan.

Butler said he was disappointed with the fund choices, which are rather limited and, with one exception, are all actively managed. "I would have liked to have seen a few passive-based asset-allocation strategies, which were automatically re-balanced on an ongoing basis," he added.

Complement, not replace

Briscoe said the plan had been designed as a complement to a pension. "It is not appropriate to put all investment in a longevity plan, but used alongside a tradition annuity, people can effectively de-risk the potential problems of a long life," he said. He stressed that people should have short-term savings to access as well.

Stuart Bayliss, IFA and director of Annuity Direct, is concerned that people sometimes take pension benefits fast to free up cash for holidays and such, but do not look to protect against inflation. Spending tends to drop mid-retirement, but those that live a long time enter a period of high-cost potential.

"Life Trust fits in quite nicely with this high-cost potential phase. People can spend early on in retirement, and if they have extra expenditure, can invest in a plan that can provide more later on if they do survive to a ripe old age," said Bayliss.

He said that, as a first product, it may not be as flexible as it could be, but there is a definite need for a longevity product in the retirement plan space.

So who does it suit?

Bayliss said there are not any direct alternatives to the Longevity Income fund at the moment. Deferred purchased life annuities have died out in the past 10 years. He explained the Life Trust product is not ground-breaking, but is more of a resurrection of an old concept, reproduced in a modern way, that is now meeting a clearer need as people live longer.

"It certainly might be worth looking at for people with tax-free cash who have paid their debts, gone on holidays and might continue working, and who are looking to use some money for long-term planning," Bayliss said.

Retirees could save into a moderate risk portfolio, which would probably grow quicker, said Bayliss, but they would not benefit from birthday bonuses and would have to be very disciplined with their saving.

Butler sees the product having appeal in the mid-market with those who need to get more income out of their capital and who are prepared to accept a higher level of risk.

Although the product meets a great need in the market, Butler said: "It is not a panacea or 'get out of jail free' card for those who do not have enough resources or cannot accept some uncertainty in return for potentially more income if they are lucky enough to live so long."

He advised that people need to go through a proper financial-planning analysis, including an assessment of their risk capacity, so they can determine a successful retirement plan. "Financial planning is no different to any other issue in that one cannot 'make a silk purse out of a pig's ear', but this product certain tries to prove that adage incorrect," he added.

Briscoe hopes that similar products will be launched as he believes longevity is and will become a huge issue for society. "The industry must come up with product solutions to cope with increasing longevity, and we hope we have created a vanguard for others to follow," he said.

KEYPOINTS

- The plan is a single bond premium with a start date at either 75 or 80 years.
- The unique 'mortality uplift' feature gives a rising annual income to plan holders.
- The plan is designed as a complement to a pension.'