These relatively new plans are commonly known as Third Way Pension products and they are already very popular in the US and Japan.
Essentially, they fit in between a Lifetime Annuity and a Capped Drawdown plan as they offer the chance to still participate in stock-market growth but with guarantees attached to either income, capital or both.
Whilst each specific product does differ in its features, the Third Way pension is usually structured in one of two ways:
Annuity – this option is commonly structured as a fixed term or rolling term, value protected annuity plan, typically running for 5 years at a time, with the option to include guarantees to protect maturity values or the level of income.
Unlike a traditional lifetime annuity, these products tend to offer the ability to alter income levels between certain limits and importantly, may also allow the facility to provide a lump sum on death within the term.
Capped Drawdown – the second type of Third Way plan is structured as an Capped Drawdown plan but with the option to apply a guarantee to the initial investment so that your fund value will never fall below a certain level.
Some plans also allow all or a portion of any growth in the plan’s value to be locked in and a new minimum guaranteed level is then set. Finally, the option to select a guaranteed level of income is also commonly available.
Under both of the above options, you can choose to immediately take a tax-free cash lump sum and then, leave the remainder of the fund invested in a tax-efficient environment to provide an income.
If the income is not guaranteed it may vary between set limits, and will be reviewed at some point between 1 year and 5 years depending on the product chosen.
The range of income typically can be anything between nil and 100% of the income that could be paid by a single life annuity and will be based in the main on your fund size, age, gender, the type of plan chosen, assumed investment returns and your expected longevity.
Where a guaranteed level of income is chosen this tends to be a fixed amount although increases may be possible.
Currently, in the UK, there are only a few providers offering these products.
When deciding whether or not to choose a Third Way pension to provide your income
in retirement, you should consider the advantages and disadvantages.