Most people wouldn't think twice about insuring their house and car, even their cats and dogs, so why not insure their pension income?
After all it's one of their most important assets and one which they plan to rely on for the years to come.
Income guarantees are essentially insurance policies, protecting retirees from some of the risks they face. One of those risks is outliving income, or longevity risk. People are living longer and most realise that keeping their pension fund invested is the main way to counter the effects of inflation and provide the potential for a lasting income, but by staying invested they are exposed to greater risk.
Investors in drawdown are particularly vulnerable to stock market fluctuations, as those who experienced the turmoil of the past 18 months know only too well. Now, even clients with larger pension funds may have a more cautious approach to investment; wanting the opportunity for growth but at the same time reluctant to endanger the income they're relying on.
For these clients, a retirement income plan from Sun Life Financial of Canada's i2Live range can be the ideal solution. Both i2Live Drawdown and i2Live Annuity allow clients to stay invested but also offer an Income Guarantee Option to protect against investment risk.
The Income Guarantee Option provides a guarantee that income will never fall below a minimum amount, regardless of what happens to the stock market. Like an insurance policy, investors can enjoy the benefits during the good times while knowing they're covered should the unexpected happen. This means benefitting from an improved income if fund performance is good and the security of a guaranteed minimum income if fund performance is below expectation.
The i2Live Income Guarantee Option can remain in place for life, unless a client chooses to remove it. The guaranteed minimum income will never reduce (providing the conditions of the guarantee are met) but it could increase at each five-yearly review. This gives a client absolute certainty of a minimum level of income for as long as they keep the guarantee in place. In fact, even if the fund reduces to zero, the guaranteed minimum income will continue to be paid for the rest of their life, so clients know their income will last as long as they do.
What price for income security?
With i2Live, clients choose exactly how much security they want. The guarantee can be added to their whole fund, or just part of it, perhaps just enough to protect basic living expenses for example. This flexibility gives clients a guarantee that's tailored to their requirements and budget, and ensures that they are only paying for what they need.
The principle of pricing the premium for guarantees is the same as that for any insurance policy, the price reflecting the cost of the risks involved. When it's switched on, the i2Live Income Guarantee Option costs 0.95% a year which only applies to the value of the fund that it's protecting. That's a relatively small price to pay for peace of mind, certainly when you compare it to other forms of insurance. For example, a 75 year old man could pay an annual insurance premium of £180 on a £5,000 car, making the cost 3.6% of the value of the car, a lot higher than insuring something as valuable as a retirement income.
Protect and invest
There are some investment restrictions in place when the Income Guarantee Option has been selected but this still gives ample scope to design a portfolio that meets a client's investment objectives.
Clients can select investment funds from the full i2Live fund range and invest up to 60% of the guaranteed fund in funds which have similar risk to equities. There's no investment restriction on any part of the fund not protected by the guarantee so clients who have used the guarantee to cover their basic living expenses for example, can look to the equity markets for investment opportunities safe in the knowledge that their main income is secure.
The benefit of hindsight
As with all insurance policies, guarantees are purchased for peace of mind. People who bought a guaranteed retirement income product before the economic crisis hit will certainly be appreciating the value of the guarantee and will also be hoping to benefit from the upside of the equity bounce. We hope the experiences of the past 18 months encourage more people to do the same. Remember: position for the best, protect against the worst.
The i2Live Income Guarantee Option at a glance:
Guarantees income will never fall below a minimum amount
Adjustable to suit the level of security required or the client's budget
Acts as an income underpin - flexible income can still be taken
A lifetime guarantee, but can be removed
Costs 0.95% per annum
Client only pays for it while it is switched on
Reviewed every five years so guaranteed income can increase
For further information please call 0845 071 0200 or visit www.Sloc.co.uk
This product is offered by SLFC Assurance (UK) Limited.
The following companies operate under the name Sun Life Financial of Canada and are members of the Sun Life Financial Group of companies: Sun Life Assurance Company of Canada (UK) Limited (registered number 959082), SLFC Assurance (UK) Limited (registered number 830572), SLFC Unit Managers (UK) Limited (registered number 1651703) and SLFC Investment Managers (UK) Limited (registered number 1900586) are all authorised and regulated by the Financial Services Authority. SLFC Services Company (UK) Limited (registered number 6997417) is an appointed representative of these firms. All companies trade under the name Sun Life Financial of Canada whose UK life and pensions business is operated by Sun Life Assurance Company of Canada (UK) Limited and SLFC Assurance (UK) Limited. Its Unit Trust and ISA business is operated by SLFC Unit Managers (UK) Limited. All companies are incorporated in England with Registered Office at Matrix House, Basing View, Basingstoke, Hampshire, RG21 4DZ. www.sloc.co.uk