Prudential launches pioneering new income choice annuity
Prudential is to launch a brand new, innovative annuity on 9 March 2009 that provides customers with the flexibility to select the level of income they wish to receive, have it reviewed annually and potentially change it every two years if they choose.It also provides a guaranteed secure level of income - a minimum below which it cannot fall, no matter what.
The Income Choice Annuity is available for customers with pension pots of just £10,000 after tax free cash has been taken. The low purchase price has been designed to widen the choice of pension income products to people whose only option up until now would have been to buy a conventional annuity.
Industry figures show that more than 60 per cent of people in the UK have less than £20,000 with which to buy their annuity, so the Income Choice Annuity's £10,000 minimum threshold gives more choice for a greater number of people approaching retirement.
Potential for income growth
It also provides an opportunity for pension income to grow because the Income Choice Annuity is backed by Prudential's with-profits fund, one of the strongest funds in the UK with around £66 billion invested.
And, irrespective of the performance of the underlying fund, the Income Choice Annuity guarantees a minimum secure level of income.
Guaranteed minimum secure level of income
When someone takes out an Income Choice Annuity, they select the income they would like to receive from within a range offered by Prudential. They will automatically receive a guaranteed secure level below which their income will never fall which, initially, is equal to the lowest starting income available in the range they have selected. The secure level can increase and once increased will never fall below the new higher amount.
If the smoothed return on the fund is higher than that needed to meet the income level selected by the customer then the income they receive in the year ahead increases by the difference between the two amounts. When a customer's income increases in this way, Prudential will lock-in 50 per cent of the increase by adding it to the customer's secure level.
Even if the fund's smoothed return is less than the amount required to meet the customer's selected income requirements, Prudential will guarantee to always pay the secure level, which means the customer has the reassurance that their income will not fall below a known minimum amount and, more importantly, that the secure level has the potential to increase over time.
If someone chooses an income at the bottom of the range available to them (e.g. £3,000) and it increases by £200 in the first year Prudential will increase the secure level by £100, providing a secure level of £3,100 at the beginning of year two. If the fund provides no return in year two, the annuitant will still receive their secure level of £3,100.
Buy direct or through a financial adviser
People approaching retirement are able to buy the annuity through a financial adviser who can help the individual choose the starting income most suitable for them, or contact Prudential directly.
New phase in retirement options
Karin Brown, Annuities Business Director at Prudential, said: "People in retirement should be able to choose an income level which suits their changing needs and has the potential to grow throughout their retirement which, in many cases, can be more than 25 years.
"Prudential's Income Choice Annuity provides the flexibility for those retiring to increase or decrease their chosen income level during retirement with the added peace of mind that it has a guaranteed minimum secure level below which it cannot drop. It's simple for people to choose the level of income they want.
"This innovative yet straightforward annuity is suitable for those considering a conventional annuity, coming out of drawdown or maybe AVC funds. It marks the beginning of a new phase in retirement options for millions of people in the UK."
Income Choice Annuity key features
Choose an income level from a set income range
£10,000 minimum purchase price (after tax-free cash) - no maximum limit
Provides a guaranteed minimum ‘secure level' which means a minimum income will be paid out, no matter what, and can increase each year
Option to review annually and change income every two years as needs change
Payment guarantee period, joint life and lifestyle/enhanced life options available
Can provide an income higher than a conventional annuity but without the full exposure to risk associated with a unit-linked annuity
Monthly, quarterly, half yearly or yearly payment options in arrears or advance
Backed by Prudential's with-profits fund providing the potential for growth, and with a ‘smoothed' return feature, reduces the effects of peaks and troughs in fund performance.
The changing annuity market
Karin Brown continues: "The current fluctuating and often unpredictable economic conditions have made it difficult for people approaching retirement to choose an annuity that is right for them.
"One underlying factor that could cause serious issues for those with conventional level annuities is that although RPI is currently very low, it is likely to rise in future. In the period between December 2001 and December 2008, RPI peaked at 4.8 per cent.
"Also, our own research has found that the real rate of inflation for pensioners is much higher than that for working people. As soon as someone enters retirement the buying power of the pound in their pocket is diminished.
"For some customers, buying a conventional annuity which is fixed from the beginning might be the right decision, but others will find that inflation erodes the real value of their income over time and for them an annuity offering the potential for growth will be important.
"People approaching retirement now, expecting to live for many years, will continue to demand more from their retirement income plans. Prudential's Income Choice Annuity will help address the groundswell of consumer expectation for more flexible, straightforward annuities that offer the potential for growth for the rest of their lives."