DRAMATIC FALL IN RETIREMENT INCOME CALLS FOR
A NEW BREED OF ANNUITIES

MGM Advantage launches innovative asset backed Flexible Income Annuity

March 2010

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(1),  and based on the difference between employer contributions to final salary and defined contribution plans(2), 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. (3)

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(4) 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.”

Product Details – MGM Advantage Flexible Income Annuity

• A lifetime annuity that offers a choice of starting income between 50% and 120% of the income that would be available from a conventional annuity
• The flexibility to vary income at key stages of retirement to meet lifestyle needs
• A choice of market leading actively managed funds from Jupiter, Newton, JP Morgan Asset Management, selected and monitored by Old Broad Street Research (OBSR)
• A choice of passive funds using funds from Vanguard – MGM Advantage is the first provider in the UK to offer Vanguard funds within an annuity wrapper. A cash fund is also available from Insight Investment.
• Enhanced terms for customers with a health impairment
• Because we’re a mutual, membership of the Society and the potential for extra income from member bonuses, without the need to invest in a traditional with-profits fund
• The usual mortality cross-subsidy benefits offered by annuities but not possible with income drawdown
• Income fixed for five year periods so people can plan their finances more easily
• Automatic five-year income reviews, but also the option for customers to make changes to income levels and investment choices at any time if required
• A Minimum Income Guarantee from day one
• The option to move to a fixed income basis or to another provider at any time
• Death benefits and all the other features you’d expect from a conventional lifetime annuity.
• The Flexible Income Annuity is sold through independent financial advisers

 

What IFAs told us:
A 2009 survey(5) of IFAs carried out by George Street Research for MGM Advantage revealed almost half (47%) of the IFAs surveyed had seen an increase over the last 12 months in the number of clients requesting advice on retirement income. 

The findings also revealed that guaranteeing a minimum income in retirement was the most important issue for 32% of IFA clients about to retire, followed by being able to vary income at key points in their life (21%).
- Ends -
For further information
Citigate Dewe Rogerson
Phil Anderson                          020 7282 1031
Alistair Kellie                            020 7282 2850
Jo Skinner                               020 7282 1092
Sophie Woodcock                  020 7282 1072

Notes to editors

• TUC website
• MGM Advantage analysis of figures from the TUC, ONS and the Association of Consulting Acturaries
• Watson Wyatt
• MGM analysis of data from ONS Family Spending Reports and the Consumer Price Index
• Research by George Street amongst IFAs, July 2009

About MGM Advantage
www.mgmadvantage.com

History:  Based in Sussex, the life assurer opened its doors in 1852 as Marine and General Mutual Life Assurance Society, to fill the poorly-met insurance needs of seafarers and traders.

MGM Advantage is a new name in the UK retirement income market. Formerly known as MGM Assurance, the company rebranded as MGM Advantage, Designs for Retirement in June 2008 and repositioned the company as a retirement income specialist.

Its launch product – an Enhanced Annuity – is designed to provide additional income in retirement for people with any health conditions or a poor medical history and is distributed through independent financial advisers (IFAs) across the UK.

MGM Advantage is a mutual society owned by its members, and manages assets in excess of £1.4 billion. MGM Advantage’s commitment to customer satisfaction is backed up by an industry-leading customer charter, which promises high quality service and a £25 no-quibble payment to any customer who hasn’t received the level of service they expected.
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MGM Advantage Designs for Retirement, MGM Advantage and the MGM Assurance logos are Trade Marks of Marine and General Mutual Life Assurance Society.