Maximising income

After the closure of its first Open Annuity product pre A-Day, London & Colonial has developed a post A-Day version that aims to deliver the same flexibility to customers. Ken Wrench tells Helen Morrissey about the product

Tell me about the open annuity?

The main audience for the open annuity is those who wish to retain control of their retirement funds. They have controlled their finances extremely well all their lives and they do not see why they should give that up just because they have purchased an annuity.

The open annuity enables people to remain fully self invested during the decumulation phase of retirement. Maintaining this level of flexibility was the major challenge for us as we developed the open annuity.

The second requirement centred around meeting people's varying requirements for income.

Thirdly we had to look at how people wanted to extract income from the fund. The current open annuity has been available post A-Day but we did have a pre A-Day version too. With the original product on death the residual fund was paid back into their fund as people want to get the best from their retirement fund. This continued to be a challenge post A-Day - how can clients continue to extract maximum value from their fund? We worked closely with HMRC on the development of the current open annuity product. Income rates for annuities are calculated using market annuity rates rather than GAD rates for example. This allows a very high rate of income to be taken from the fund - in many cases larger than that which could be extracted using unsecured income or an alternatively secured pension.

How long has the open annuity version been available?

The second version of the open annuity was developed in response to the A-Day regulation and as the full extent of the regulation was not made known for over a year, it has taken us some time to fully develop the product.

At the moment we are focusing on educating IFAs and ensuring they understand the product. It takes time to introduce these products to the market properly. We have found that interest in the product is beginning to build now but it does take time. Circumstances are particularly uncertain for people coming up to retirement now and many of them are holding back on making any decisions. However, once people take time to think through their options properly they will start to make more concrete decisions.

What trends are you seeing in how people are taking their retirement income?

I am aware that people are increasingly looking to split their retirement pots between annuities and income drawdown so they can benefit from the market upside available from the income drawdown, while also getting the guarantee that comes with the annuity. Retirees also really do not want to burn their bridges by making irrevocable decisions and so the open annuity enables them to keep their options open. For instance, when annuity rates are low people will not want to lock into a rate that is too low - they would prefer to wait.

Who is the open annuity aimed at?

The open annuity is aimed at people with large pension funds - probably at least £100,000. With the original open annuity, the average sized pot was somewhere around £600,000. We do cater for people with smaller sized funds but they tend to also have assets elsewhere that they can draw on. It is all about making sure that the open annuity is only sold to those who can really benefit from it.

We are very concerned that these products are only sold with proper advice, and so we set a high minimum to dissuade people who are unsuitable. The individual's circumstances are all important in establishing the best product for them.

Where do you see this product fitting into the at-retirement market going forward?

I see the open annuity as becoming an established part of the at-retirement landscape but only in the right area.

I think when it comes to high net worth customers then the open annuity should become the norm, particularly as there are no similar products currently available on the market right now. We see it very much as a fourth-way product that enables retirees to retain control of their investments and keep their options open while also enabling customers to get the maximum income available. Once the income is released the customer can do what they want with it. They can put it into trust if they wanted. Of course no one product is right for everyone but in the right circumstances this product can really meet customers' needs. We hope to see more providers enter the marketplace with similar products in the very near future.

- Ken Wrench is CEO at London and Colonial.

Benefits of the Open Annuity

- They can extract at least 35% more income than from an ASP;

- They can remain fully self-invested while decumulating funds;

- Option to convert to a conventional/enhanced annuity at anytime;

- Add or change the nominated second life at any time;

- Residual fund on death can be donated to the client's nominated charity;

- There is a 10 year guarantee period without reducing the annuity income.