Given sufficient time, the old adage of "what goes around comes around" is normally true. A revival in traditional financial products like the Maximum Investment Plan and Individual non-profit deferred annuities are both examples of this in the provision of retirement income.

Deferred annuities were common place in the early eighties but fell out of fashion when Personal Pensions (PPs) were introduced in 1988. In those days the stock market was booming and annuity rates were delivering twice the income levels of today. Deferred annuities were seen as too conservative an investment when compared with many unit-linked funds that produced double digit returns year on year and so its demise was understandable. Twenty five years on, several stock market crashes later and with annuity rates at their lowest level ever, a rethink in retirement planning strategy seems like a good idea. It is no surprise that managing risk is at the heart of every advisers remit.

Managing clients' expectations when it comes to what income they can reasonably expect to achieve, is no easy task!

The Guaranteed Retirement Plan (GRP) is an individual, non profit, deferred annuity in a personal pension wrapper. Launched in March 2010 it is (currently) unique because it is the only personal pension governed by defined benefit rules.

It is designed to provide a guaranteed income at a pre determined date in the future in exchange for a single premium or a transfer of pension funds. By providing clients with certainty, irrespective of any poor investment returns or falling annuity rates is its unique selling point. The best analogy to draw is with purchasing a fixed rate mortgage – ability to budget with certainty and protection against interest rates going in the wrong direction, ultimately providing peace of mind.

GRP can be easily understood by even the most un-sophisticated saver / investor because it delivers what it states on the tin. Requiring something different to the tin is accommodated by choosing from a range of options that does not mean losing the entire valuable guarantee. However selecting some of the options may increase the level of detail and complexity of the product.

GRP is designed to deliver a vanilla income – Single life, level, monthly in advance with no guarantee period. If a spouse's income, guarantee payment period or Pension Commencement Lump Sum (PCLS) is required then options are available at the time benefits are taken. Taking benefits later or earlier than selected at outset is also possible but the guaranteed income would be actuarially adjusted. The PCLS is calculated using commutation factors, which are also used to calculate tax free cash in final salary schemes.

The basic product details are as follows:

• available from age 45
• maximum deferred period of 20 years – minimum 5 years
• maximum age at entry 70
• maximum age to take benefits 75
• transfer of benefits are available

GRP can be used to accumulate a pension fund and is tax relievable in the same way as any PP but its core market is to assist in the consolidation and de risking of accumulated assets leading up to and beyond retirement.

With new rules in April 2011 removing the requirement to annuitise at age 75, GRP can provide a solution to a new problem. Clients with sufficiently large funds to benefit from taking a flexible drawdown (unlimited restrictions on withdrawals) must have sufficient guaranteed income for life in payment – the Minimum Income Requirement or MIR. Managing an income stream over a client's lifetime (rather than up to age 75) will be a new challenge for advisers.

• MIR of £20,000 can be met by income from the state pension, occupational / scheme pension or from a life time annuity. Meeting this MIR can be accurately targeted for either, with new contributions to the GRP or by transferring benefits from an existing plan and could be less expensive than waiting to buy a Lifetime Annuity (LTA) to achieve the same result. For example a male aged 55 with a fund of £100,000 could purchase a Guaranteed Retirement Plan income of £9,035, available at age 65. This would be 35% cheaper than buying it at age 65 under current Canada Life LTA and GRP rates. It is true that annuity rates could improve in the meantime but they may also reduce further – Solvency II, possibility of unisex rates, growth in enhanced annuities and improving mortality figures are all factors contributing to pressure on annuity rates.
• Using GRP as a longevity annuity can assist in managing drawdown income more effectively and insuring against potential fund depletion. Having this guaranteed income outside of a drawdown arrangement may be more tax efficient under the new rules – lump sum death benefits will be taxed at the new rate of 55%. GRP death benefits are guaranteed, even if by return of premium. They will be tax free up to the age of 75 if in deferment. GRP for use within a drawdown arrangement is a possible future enhancement.

Nigel Orange
Technical Support Manager (Pensions)
Canada Life Limited