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   Retirement Options - Other Annuities - FLAs


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      An Annuity - but with another name

 

Topical Issues

 

Elsewhere on this site we have discussed the concept of Lifetime Annuities.

 

On the current page the focus will be on Flexible Lifetime Annuities (FLAs) after a brief introduction to Enhanced annuities:

 

Enhanced Annuities:

 

Enhanced annuities offer one of the very few opportunities in life to actually benefit from your present (or past) vices! So, it is an opportunity that you should certainly not miss if it applies to you!

 

It is now possible to obtain underwritten annuities for individuals suffering from ill health or having a reduced life-expectancy due to life-style issues (smoking, obesity etc.). In the same way that e.g. smokers may now pay 25% more for their life cover, smokers could obtain up to 15-20% better annuity rates. While underwriting medical problems should always be looked into, severe ill health is sometimes better dealt with via drawdown arrangements or high-level reversionary annuity.

 

Flexible Lifetime Annuities [FLAs]:

 

Some of the following observations are based on an article by Nigel Orange in New Model Adviser Feb 08, 2012

 

Alternative Annuities

 

For those willing to take a degree of risk with a least some of their retirement funds, Flexible Lifetime Annuities (FLAs) offer a retirement solution that can be adapted to meet many pensioners’ changing needs.

 

Last year the lowest ever annuity and Government Actuarial Department (GAD) drawdown rates were recorded, and the immediate future looks no better.

 

Flexible lifetime annuities (FLAs) are just one type of asset-backed annuity with some benefits and characteristics similar to both those offered by drawdown plans and lifetime annuities.

 

FLAs can provide a secured income option and are regulated by the same rules which govern lifetime annuities. Recent legislation, combined with the challenges of longevity and low annuity rates, have put increased focus on FLAs.

 

Some of the key difference between FLAs and ordinary drawdown plans, in terms of income, death benefits and the lifetime allowance are summarized below:

 

Income

FLAs can deliver a higher maximum income than drawdown due to the changes in annuity and drawdown legislation that came into force in April last year (Finance Act 2011).

 

Capped drawdown income is calculated using the revised GAD table (where the maximum limit has been reduced from 120% to
100% of GAD) whereas FLAs continue to pay a maximum income of 120% of the provider’s standard annuity rate, which can be around 30% more than that available under conventional drawdown.

 

A minimum income must be provided with a FLA, set at 50% of the provider’s standard annuity, whereas drawdown carries no requirement to take income.

Drawdown does not benefit from any mortality credit, which is an important feature of annuities.

 

Most providers of FLAs will have an upper age limit after which a fixed income for life must be taken, whereas there is no age limit under a drawdown arrangement.

 

Death benefits

There is a key difference in the facility in drawdown to pay beneficiaries a lump sum death benefit from return of fund.

 

Some providers of FLAs offer lump-sum death benefits via an annuity or value protection but the rules allow for the return of the original premium less any income paid out, making fund growth irrelevant.

In both cases, the death benefit will be taxed at 55% so a 10-year guarantee period, if available, with an FLA may produce a better net benefit, depending on your tax position.

 

Furthermore, ff the guarantee is written under a discretionary trust, it is normally protected from any inheritance tax.

 

Lifetime allowance

Persons using drawdown, unlike those embracing FLAs, face a further lifetime allowance check (BCE5A) at age 75.

 

This can be quite important for more affluent clients for whom investment growth is likely to tip the drawdown fund value over the limit of £1.5 million in the 2012/13 tax year. Any excess has to be taken as income and will be liable to a 25% recovery charge.

 

FLAs versus conventional annuities

Any advantage FLAs have over conventional annuities can only be inferred on the assumption that a client is willing to forgo the certainty and guarantees of a fixed or increasing level of income for life in favour of the greater flexibility offered by a FLA.

 

Reasons to opt for a FLA could include:

 

The big drawback of including an escalating or inflation-proofed income with a conventional annuity is the lower starting level, ie the cost.

 

An alternative might be to opt for a FLA in the expectation that good investment growth will eventually result in a rising income level. However, any positive investment returns could be negated by lower annuity rates when a fixed lifetime income is required.

 

One advantage of opting for a FLA over a conventional annuity might be on health grounds. An average male aged 65 will enjoy a life expectancy of about 17.6 years and a disability-free life of only 10.2 years.

 

Deferring full annuitization until an enhanced annuity is possible can make good financial sense.

 

With a joint life conventional annuity with a spouse, the cost includes cover for the life of the annuitants. If a spouse is significantly older than the main applicant or in poor health, the chances of them pre deceasing the annuitant are significantly increased.

 

With some FLA providers, if this was to happen the spouse could be removed at the next available review, allowing a single life income to be purchased with a higher income or more for investment.

 

The vast majority of retirees naturally require (and value) a level of security. However, an increasing number are also requiring greater flexibility, an the possibility of keeping options open for as long as possible.

 

Striking the right balance between security and guarantees and maintaining a degree of flexibility is not easy – but at least knowing the facts provides an important first step towards making an informed and intelligent decision.   

 

NOTE: The Pension changes announced by the Government in the Budget 2014 are likely to also affect FLAs but as yet there are no specific details available. PLEASE CALL NFA for further Info.

 

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