September 2008

Advertising Feature - Drawdown

Draw down cautiously

Retirement planning has to be one of the most financially significant tasks a person will ever undertake. People are living longer and expectations of high living standards are also increasing. As a result, making the most of your retirement assets is, on the one hand, highly desirable, and on the other seen as complicated and time consuming. Income drawdown is widely known to be an option which customers can use to optimise their income but, for many, it has belonged in the 'too hard' or 'too risky' category.

The retirement market has, however, changed rapidly in recent years in terms of flexibility, transparency and investment options and now income drawdown is no longer the preserve of the wealthy, sophisticated investor with a healthy appetite for risk.

Clients want simplicity of product and transparency of charges, the ability to invest where they want and flexibility to draw income whenever it suits them. As well as changing customer demands, legislation has also changed the structure of the drawdown market. The zero income option, and the introduction of more cautious investment options, have made drawdown more accessible and appealing. Against this background Prudential has launched its new drawdown product.

The Flexible Retirement Plan

Prudential's Flexible Retirement Plan (FRP) allows clients access to a personal pension, self investment option and income drawdown within a single product wrapper designed to provide increased flexibility for both customer and adviser.

By offering an account-style plan with a single charging structure, the FRP product allows clients to consolidate their pension savings in one place, with the flexibility of being able to move gradually into income drawdown as they retire. Charging under FRP is designed to reward customers for loyalty (policy duration) and on fund size. Discounts are available up to 0.3% per annum for fund size and 0.25% per annum for loyalty. Advisers have the flexibility to agree their remuneration options with the client on a fee, trail, fund based or initial commission basis.

The FRP includes an integrated option to access self investment, managed by Suffolk Life, at any time with the option to access just the Cofunds fund supermarket if wider investments are not required. This lower cost option allows access to up to 20 funds from the Cofund range and is called FundSIPP.

Underpinning the proposition is Prudential's expertise in multi-asset fund management, which lends itself to the more cautious income drawdown investor. In particular, the with-profit option has great appeal to investors seeking the potential for investment upside while avoiding some of the volatility of unit linked funds. What better time to illustrate the benefits of investing in a fund that is designed to take the edge off uncertainty and deliver solid, steady returns? With-profits aims to provide higher returns than deposit accounts with fewer of the ups and downs which can be experienced from direct investment in shares or unit linked funds.

Drawdown clients choosing with-profits will have their money invested into our £67.5+ billion with-profits fund. The asset mix of Prudential's with-profits fund was 33.8% UK equities, 15.3% international equities, 14.9% property, 29.7% fixed interest and 6.3% cash and other assets (as at 30 June 2008).

Unlike many other asset choices, you are guaranteed at age 75 to be able to get back at least as much as you pay in, less any income and charges. In addition, at that time, you will also get to keep any bonuses that have been added. In other words, this is an investment choice with capital guarantees. This means you know that market fluctuations will not reduce funds at age 75. You can convert the full value of your fund at that time to an annuity with Prudential or any other provider without fear of a market value reduction (MVR) being applied.

One of the concerns surrounding with-profits is the MVR and when it is applied. Within Prudential's FRP contract, customers have two MVR free dates - at their selected retirement age (under the personal pension), and at age 75 (under income drawdown).

No MVR is applied on death or on any income taken.

The resurgence in with-profits within the post retirement market is not just driven by the need for growth with guarantees. The consistently strong fund performance from providers such as Prudential has also been a factor.

The table below shows the longer term returns of Prudential's With-Profits Fund before tax, charges and the effects of smoothing.

To put these figures into context, the FTSE All Share total return over five and 10 years were 96.6% and 82.4% respectively while the FTSE 100 returned 87.7% and 69.2% (as at 30 June 2008). The value of a client's policy will depend on when they actually invested. The value could change by more or less than the returns achieved by the overall fund.

Many concerns about income drawdown arise because investing rather than annuitising means taking extra risk. The so-called third way annuity market is seeking to address these concerns, but new third way products, to date, may seem complex and expensive to many customers.

With-profits in income drawdown is a tried and tested vehicle that helps balance the desire for investment growth with the fear of taking risks. With-profits allows access to potential market growth while offering capital guarantees - perfect for the more cautious income drawdown investor. A third way product before the term was coined!

The retirement income market offers a wide range of propositions, designed to meet different customer needs. No single product is right or wrong - each has their place according to risk appetite and income need. With the introduction of the income drawdown option under our FRP, Prudential can now provide a complete portfolio of retirement saving options within a single product wrapper, as well as the option to annuitise across a range of unit linked, with-profits, enhanced and conventional annuities, providing a cradle to grave solution.

Athole Smith
Head of Business Development for Annuities and Income Drawdown
Prudential