Good news- one insurer has just slashed its pension prices to make income drawdown affordable for all.
For years we’ve been told that income drawdown was too expensive a pension management system for all but the DC glitterati. The consensus was that you needed £150,000 in pension savings (£200k before you take the tax free cash , to get much value out of drawdown. But what about this Click on the link to discover LV (Liverpool & Victoria not luncheon vouchers) is offering drawdown to those with a pot of £30k. As most people with smaller pots than £30k will probably be considering cashing out under the transitional rules, this means LV are providing a mass-market drawdown product. Which is pretty good news for anyone wanting to draw an income between now and the end of the year and stay invested. This is certainly a decent option compared with the one year temporary annuities knocking around. And it suggests that given a kick in the pants, the financial services industry can deliver value.
But what took LV so long, and why aren’t similar products on the market from other providers?
LV has been hard hit by the Budget proposals, there best hope is that people are adopting a ” “wait and see” strategy to annuity purchase but all the signs are that annuity purchasing isn’t going to return to pre budget levels -ever. Insurers with a high-dependency on annuity sales are in deep trouble and the market has massively marked down their share prices to reflect this.
So LV have no choice but to play hard for the money they are not getting in annuities.
The LV offer is basically a 0.25% management charge on funds plus an investment charge which starts at 0.1% (but escalates quickly as soon as you leave passive country). You’re investing in a personal pension with LV which means you get a transfer value if you jack-out. All you’re really losing by switching is the set up cost of £295 which will have pushed up the first years management fees by up to 1%. I’m really pleased that this product is now available. But are their snags? Can I buy this independently or do I need to go via a financial adviser? If I can go direct to LV – what are the implications for me as an insistent investor? Assuming that the everyday Joe or Joess, decides they want this kind of product post 2015, will they be able to transfer their pot(s) to it without fuss or are they going to have to go through the shredding-bin’s worth of paper I had to sign when I brought my pots together last year?
If LV are first – who will follow?
The next question is – if LV can do this- what can others do? LV aren’t the best known pension provider in the market, most people would reel off a few brands among insurers who would spring to mind ahead of LV. And what of the master-trusts? NEST are out at least till 2017, (not allowed to take in transfers). But Now, People’s ,BlueSky, Friendly, Supertrust, Smarter Pensions and Salvus (to name but the tip of the iceberg) all have the capacity to take your money and pay it back to you as you request!
The thin end of the wedge for the insurers?
What LV have opened is (IMO) a can of worms for the insurers but a boon to those with pension savings! They have demystified this gloriously complicated income drawdown product and so reduced its costs that it looks competitive with group personal pension contracts. How can they do this- one simple reason – they get the assets up front . Even with £30,000, the prospect of taking 0.25% pa plus a clip on the fund management (not disclosed) is obviously worth doing. With fixed costs, it’s the bigger stuff that pays the bills.
What does all this tell us?
One insurer has broken ranks and brought out a radically cheaper product that looks right for the mass market. Where one goes, others are bound to follow- LV are first onto the circuit but the Ferraris and Mercedes (L&G ,Standard &Co) will be fiddling with their pre-budget models. It only takes one of the big master-trusts to deliver a killer product and the floodgates will be open.
It looks like market interventions (at least in this market) work
It seems it took a market intervention of the size of the budget, for the financial services industry to do the right thing for those coming into the spending phase of their pension. The ABI and the IMA may not like to hear this, but the success of this intervention may lead to more, unless that is, the insurers and fund managers play ball. There is still considerable resistance to the transparent , value for money framework set out in the DWP’s Command Paper -“Further Measures for Savers”. In my view – to coin the phrase
“resistance is futile”.
This article was first published in www.pensionplaypen.com/top-thinking