Little things matter. A lot.
Take fund charges. The difference between a charge of 1.0% and 0.59%: 0.41% doesn’t seem like much really, does it? On a £100,000 fund, that’s equivalent to £410. If you factor in 7% growth over the year, it’s around £440.
In the overall scheme of things, not much at all.
But factor in a long period of time and recurring charges and the picture doesn’t look nearly so rosy. Over 20 years, the difference in fund size could amount to over £27,000. By that time your fund could be worth £340,000 so the effect of the extra 0.41% charges is equivalent to 8% of your final fund.
Now, obviously, the difference of 0.41% per year could be made up by better investment performance over the period. The question is: will it be? And how much work will that involve? In 2011, the Netherlands Authority for the Financial Markets, in a review of the academic research into active vs passive management[1], concluded that “studies of equity and bond fund returns produce no evidence that fund managers as a group are able to generate out-performance after deduction of costs” and that “selecting active funds in advance that will achieve out-performance…is exceptionally difficult.”
Compare it to a lower charge of 0.75%, there could still be over £10,000 in the fund after 20 years.
So passive investment can be highly efficient and your client could end up with more in their fund.
Furthermore, it’s worth considering how underwriting impacts on income.
Spend a mere 20 minutes asking questions about health and more than 50% of people at retirement could qualify for an enhancement. Medical underwriting could increase income for life by as much as 30%. A smoker with type 2 diabetes, for instance, could see an increase of 14% in the income they receive.
Put another way, should your 65 year-old client require a guaranteed income of £5,000 per year from their fund, the cost based on standard annuity rates would be £84,964. With this enhancement the cost would reduce to £74,548. If they had £150,000 in their pension fund, after tax free cash*, the amount they could leave invested would increase from £65,036 to £75,452, a rise of 16%.
£65,000 invested for 20 years with a 0.75% annual charge could grow to £216,000 at 7% p.a.
£75,452 invested for the same period with a 0.59% annual charge would grow to £259,000**.
So for the combination of an enhanced income coupled with straightforward, low cost investment, your client could end up with £43,000 more in their fund at the end of 20 years. This is all done without sacrificing income from the guaranteed income or the flexibility of drawdown. That’s 20% more money to pass on to their family or do with as they wish.
One thing they may wish to do is to increase their guaranteed income at some point in the future, perhaps due to increasing costs, requirement for more security, fears about investment markets falling, deteriorating health or mental capacity. Underwriting will give them access to a tailored enhanced rate for their conditions. Building up guaranteed income in this way helps improve security with age, reducing exposure to the adverse impact of volatility and smoothing the impact of changing rates.
Other changes could lead to your client wanting to reduce their income. An unexpected inheritance, commencement of a state or other pension, even earnings from employment could be the cause. The ability to leave a guaranteed income within the pension wrapper, invested or held in cash, would provide an opportunity for your client to avoid paying more income tax than they need. However, this has been very difficult, usually impossible, to arrange with an annuity since it would usually sit outside a drawdown plan.
With Partnership’s new hybrid plan, it is easily done.
The guaranteed income element is held within a SIPP, on a platform, so everything is kept together. Income can be suspended and reinvested, in the same low cost funds, or held in cash – with no tax payable whilst invested. You can also purchase additional guaranteed income from the Flexible Investment Element.
You only need to administer one product, as opposed to multiple products. One package providing the appropriate balance of income and flexibility for your client, all with the possibility of Partnership’s enhanced rates for income if they have impaired health or lifestyles. One source of payment, one payment for tax, all on one platform.
At Partnership we are all about making your client’s life better, with the added benefit of offering a simpler advice process. The Partnership Enhanced Retirement Account has been designed to be efficient:-
- Low charges
- Simple choices
- Enhanced rates for impaired health and lifestyles
- Flexibility in one plan
All these little things add up. Scope for a better return as well as certainty for your clients, more efficient administration, offering flexible adviser charging options, all in one place. For those with moderate resources requiring certainty and flexibility, Partnership has the solution.
For more details, call us on 0333 043 7040*** or visit the website: www.Partnership.co.uk/ERA
