MGM Advantage launches asset backed Flexible Income Annuity
MGM Advantage, the innovative retirement income specialist, has issued a stark warning that retirement income is set to fall dramatically and to address this, there needs to be a new breed of annuity products. It predicts that the conventional annuity will become less attractive and increasingly redundant for many people in retirement.
MGM Advantage estimates that £135 billion of pension funds will mature in the next five to ten years and that new retirement income solutions are needed to maximise this money's potential.
The company has launched a new and unique asset backed annuity - the Flexible Income Annuity, which will give customers the potential to receive a greater income than through a fixed level conventional annuity. The new product includes the flexibility to change income levels at different stages of retirement and the potential for growth and therefore the potential to negate the impact of inflation. It also provides a minimum income guarantee and death benefits.
The flexibility of the product and the fact that the minimum investment is £10,000 means it's suitable for the majority of UK consumers who are willing to accept an element of investment risk on some of their pension savings, providing they have a minimum income guarantee to rely on. Low annual management charges and a simple range of investment funds to choose from will make the product attractive to a previously poorly-served group of retirees.
The new product is the first in the UK to offer access to Vanguard funds within an annuity wrapper, as well as a choice of market leading actively managed funds from Jupiter, Newton and JP Morgan Asset Management, all of which have been selected by Old Broad Street Research. A cash fund is also available from Insight Investment.
MGM Advantage believes that there are three key factors that mean retirement income levels are falling - the growing switch from defined benefit to defined contribution pensions, increased longevity and regulatory changes. The proposed introduction of new European rules for insurers (Solvency II) in 2012 could be bad news for those people approaching retirement as it may force insurers to increase the capital they hold. This would impact annuity rates, with estimated further falls of about 20%.
There are two million fewer people in defined benefit (DB) pension plans than there were in 1995, and based on the difference between employer contributions to final salary and defined contribution plans, MGM Advantage estimates that £7.01 billion a year less is being paid into their pensions by employers. A further one million people are expected to be moved from DB plans to cheaper alternatives over the next three years.
In relation to people living longer, MGM Advantage estimates that a man retiring at 65 today can expect to live for 20 years, and his household cost of living could total £745,744 over this period. This will only increase as life expectancy expands and conventional annuity rates will fall as a result of this.
Finally, the fact that many people are starting families later on in life, and that children are staying in education for longer, means that the pressure on parents to financially support their children will be greater and could carry on well into their retirement.
Chris Evans, Chief Executive, MGM Advantage comments: "The income challenges facing people in retirement are greater than ever, and are becoming more and more pronounced. Conventional annuities will become less effective at dealing with these challenges. We need radical change in the industry built around delivering new solutions that are based on providing greater returns and more flexibility. That is why we have launched an innovative new annuity product that we believe meets the long term requirements of the retirement income market."
Aston Goodey, sales and marketing director, MGM Advantage comments: "We believe that there is a large and as yet unfulfilled gap in the annuity market which is potentially worth £135 billion over the next five to ten years. This new type of flexible income annuity will appeal to customers who want the freedom to choose the level of income they wish to receive at key stages of their retirement whilst offering a way to offset negative inflationary effects.
"The past two years have been particularly tough for those about to face retirement and our research reveals that for those people addressing their retirement income needs, a key concern for them is to protect their income from the negative effects of inflation. That is why our new product enables customers to accept an element of investment risk in return for the potential to grow the retirement income provided by their annuity."
Stuart Bayliss of Directly Financial comments: "Since prior to the introduction of drawdown in 1995, we have been looking for flexible alternatives to the guaranteed lifetime income annuity.
"MGM Advantage's new product offers investment and income flexibility, allowing those who wish to be actively involved in management the opportunity to do so while also offering both a good cash fund and the passive option through Vanguard, a high quality passive investor with low charges who we have used with appropriate drawdown clients for some years.
"At a time in the market when conventional rates are unlikely to offer any improving value, the flexible income annuity should prove a very useful addition to pension income planning."
Tom Rampulla, Managing Director of Vanguard Investments UK, comments: "We are delighted that investors will be able to access Vanguard funds within an MGM Advantage annuity wrapper because Vanguard's index funds offer investors broadly diversified exposure to equity and fixed income markets, at a very low cost. This should help retirees ensure that less of their money is eaten up in charges."