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 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
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
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:
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.
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
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.
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%
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
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
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
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.
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.