Longevity Income Plan

by Martin Vaughan on 1 August 2008

lifetrust_110x110.pngWe thought it would be a good idea to start to provide reviews of new products. We felt that as we were reviewing Plans and products and trying to understand them as part of our day jobs it would be good to share this information with our readers.We have tried to set this out in a way which answers basic questions and tried to collate all the various pieces of information from the company literature and present this in a way which is appropriate for paraplanners, whatever their level of knowledge or experience.

Invariably when a company launches a new product there is lots and lots of information but not all of this is relevant to us as paraplanners. We want to know how the Plan works, the technical information, who would use the Plan and where it would fit into a solution for a client.  We hope that this is a useful starting point for you when conducting your research.

The first product we have looked at is the Longevity Income Plan from Life TrustThis is a new addition to the growing ‘hybrid’ or ‘3rd way’ retirement planning market but approaches the issues in a different way than other competitors by focusing on creating rising income in later life as part of an effective deccumulation strategy.

What is it?

The Longevity Income Plan is a retirement plan designed to protect clients against the key financial risks that face many in retirement – living a long time and the compound effect of inflation.  The main feature of the Plan is that the longer clients live, the more money they could receive. The Plan is best used as a “booster” to existing sources of retirement income, such as pensions and annuities.

The potential for rising income is made possible by a combination of offshore investment growth and the allocation of bonus fund units each year, called “Birthday Units” throughout the life of the Plan.

Who’s behind it?

The company behind the Plan is Life Trust. They are a new company who launched in January 2008 and are the first provider to specialise in providing financial solutions to deal with challenge of increasing longevity.  They are financially backed by JP Morgan, Royal Bank of Scotland and D. E. Shaw.

What does the Plan do?

The Plan provides an annual payment to the Planholder shortly after their birthday from the age at which they choose to start taking income – any age between 75 and 80.  The Plan will make 21 annual payments, and then it will cease.

How does it work?

The Planholder makes an investment anytime between ages 18 and 75 next birthday.  The investment can be for an amount of between £5,000 and £1,000,000. The minimum period before payments commence is 5 years, so Planholders can invest right up to age 75 for an 80 Plan.

Clients investments’ into the Plan grow in two ways: through the performance of their investments in a range of carefully selected funds and, uniquely, through the allocation of additional fund units, called Birthday Units, to their Plan each year.

Birthday Units arise from the fact that all Planholders’ funds are mutually invested. This means that when Planholders die or surrender their Plan, their funds are re-distributed amongst all remaining Planholders as extra fund units, “Birthday Units.”

If clients need to cash in the Plan, they can do so after 2 years, however they cannot cash-in the Plan once payments have started.

The Plan also has a death benefit – if the Planholder were to die before payments had started then they would receive an amount equal to their original investment. If they die whilst they are receiving annual payments then the annual payments stop and the Planholder would receive an amount at least equal to the original investment, taking into account the payments they had already received.

As the Plan is treated as a PLA, part of the annual payment the Planholder receives is treated as return of capital and is therefore not liable to income tax.

Who is it for?

This Plan is designed for individuals who are in good health (they are not aware of anything which is likely to shorten their life expectancy) who wish to insure against the possibility of running out of income as they get older.

What’s the point?

To have a Plan which will provide a rising income well into old age, helping combat the effect of inflation and rising cost of living in later life.

People are living longer; in fact someone who is aged 50 now will have a 45% chance of living until they are 90!  This means that the traditional way of providing for income in retirement, annuities (as there are fewer and fewer final salary schemes) may well have to provide an income for at least 30 years.  Take into account the fact that many people opt for a level annuity rather than one which increases means that in real terms their income will decrease every year!

Because the Plan offers a rising income in old age, it can counter the effect of inflation, meaning that clients can continue to enjoy the standard of living they’re used to in later life. It can also help pay for unexpected costs such as care, if required.

So the point is to have a product which compliments the other, more traditional, income streams by getting clients to invest what could be a relatively modest amount, at a time when they are most likely to have capital, to provide a safety net of inflation-proof income should they survive into their 80s and 90s.

Worked examples

Life Trust has produced some of the best web based product information I have seen for quite a while.  You can download several documents in PDF format considering the following scenarios (click here and you will go straight there):

  • Supercharge a level annuity
  • Loan trust
  • Final Salary Pensions
  • Discounted Gift Trust
  • Lifetime Income Planning

There are also three video guides looking at different scenarios in more detail (click here and you will also go straight to the right place on the site):

  1. How longevity is increasing
  2. Impact of increasing longevity
  3. Longevity risk

Personally, I like this form of marketing as it gives you access to the product’s details and how it works whenever you choose to do so.

Is there an investment element?

Yes! The Planholder’s original premium is invested for at least 5 years before they can even start to receive any annual payments from the Plan.  For that reason Life Trust worked closely with OBSR to define 4 risk categories Cash, Cautious, Balanced and Growth (unsurprisingly!) and to select relevant funds for each of the risk categories.

At the outset of the Plan you can select as many of the funds as you wish in the percentages you wish, the only proviso is that the minimum amount for each fund must be £500.  If at some point you wish to change the funds you can, the Planholder is allowed to switch funds 3 times per year; the first switch is free and then it is £25 for each switch after that.

Can the Plan be placed in Trust?

Yes. Both the death benefits and the income payments can both be placed in Trust.

How is this treated for Inheritance Tax?

Placing the original investment into trust would be classed as a Potentially Exempt Transfer (PET)

Is there a place for this in the market?

Yes I think there is. There is certainly no other product like this and the Plan is trying to provide a solution to what is only going to become a larger and larger problem.

With any new product it is always difficult to see exactly where this would fit but I feel this could be suitable for a client who has a reasonable to good life expectancy and who is prepared to give up some of their capital to secure an income to support them should they reach an advanced age.

I could see this being an option where a client is undecided whether to take a level annuity because they want the higher amount of income now or an increasing annuity because they don’t want to have effectively less income each year because of inflation.

They could take out a level annuity then in 10 years time the annual payment from the LIP would start which would add to their income.

It also works with drawdown clients, allowing clients to take a higher level of income in the early years of retirement, knowing that the income from the LIP could kick in later.

What’s it similar to?

That’s the problem – it’s not. It’s a new product from a new company.

However, having said this there would be no reason why a client couldn’t invest the amount they were going to invest and then purchase a PLA at the time they need the income. The advantage of this course of action would be that they could always get at their investment whilst it is being invested; they would have a much greater choice of investment; they could purchase an annuity at a time to suit them. However they would not get the security of the death benefits, particularly when the annuity is being paid and the advantage of the ‘Birthday Units’.

Although investing now and purchasing a PLA later is an alternative, there is no guarantee that at the time they need the income, PLA rules will still be the same. Choosing the LIP will give peace of mind now and cut out uncertainty.

Technical Stuff

  • Minimum age at entry – 18
  • Maximum age at entry  – 75 on next birthday
  • Minimum premium – £5,000
  • Maximum premium – £1,000,000
  • Initial charge – 5%
  • Initial commission – 3%
  • Trail commission – 0.5% of fund value for the life of the Plan
  • Number of funds – currently 10
  • Minimum investment per fund – £500
  • Top Ups allowed – No (but you can take out another Plan)
  • Surrender Value – Surrender possible after 2 years. No surrender after Vesting Age has been reached. Surrender Value is the original investment amount less initial charge or current fund value less any Birthday Units added, whichever is lower.

Birthday units? What are they?

Birthday units arise form the redistribution of fund units which were held by Planholders who have died or surrendered their Plan during the year and are so named because they are reallocated to other Planholders on their birthdays.

The calculation of birthday units takes into account the actual mortality experience of the pool and hence the actual number of birthday units available for redistribution (if everyone stayed alive for ever there wouldn’t be any birthday units!)

Summary

The Plan certainly fills a gap in the market and for certain clients it does provide a solution which will give them an added source of income at a time when they most need it. It is not a solution that should be used in isolation and is intended to be a Plan which compliments other products which provide income in later life.

There are a number of assumptions made and in order for the Plan to be appropriate you have to agree with the assumptions made.

  1. That a client will need more income as they get older. There are many theories which say that as a person gets older they will need less income not more. However these theories don’t factor in the effect of inflation over time or the possibility of needing to fund care in old age.
  2. That the initial investment will continue to achieve growth. It is possible that the amount available after 10 years could be less than the amount invested.  Due to the combination of fund growth and addition of Birthday Units every year, this scenario is highly unlikely.

So if a client doesn’t need these things then the Plan probably isn’t for them.

Where can I find further information?

Website – www.lifetrust.com

Email – salessupport@lifetrustplc.com

Telephone – 0845 051 8351

There is a wealth of information on the website which is very easy to use and explains the product in a much greater way than we could do here.

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