U.K.: Mortality Uplift - How To Avoid Outliving Your Savings

LONDON (Reuters), January 10, 2008: Consumers can now protect themselves against the risk of outliving their retirement savings, with the launch of a new type of financial product. The longevity income plan, the first product by newly-formed Life Trust, has been designed to deal directly with the financial issues of increasing longevity. Unlike traditional annuities -- whereby insurance companies keep any unused capital when a customer dies -- Life Trust will redistribute investment fund growth accruing to funds previously held by deceased policyholders to those still alive. These "birthday units", coupled with investment returns, which are also calculated to increase each year, lead to a rising income as the policyholder ages. Sales director Simon Burgess said this "mortality uplift" could add about 2.5 percent a year beyond fund returns. Someone who invested 50,000 pounds when they were 50 could expect an initial payout of 19,600 pounds by the time they were 80, assuming annual investment returns of around 7 percent. The payout would rise to 30,600 pounds by the tenth year and if the plan holder was still alive to receive the final payment 20 years later, at age 100, the payout would have grown to 257,000 pounds. If a policyholder dies before they start drawing from the plan the original investment is refunded to their estate, and if they die before the maximum 20-year payout period is up their estate is refunded the original sum minus any payments they have received -- meaning people never get out less than they put in. Life expectancy has soared on the back of medical advances and healthier lifestyles -- but that has led to a looming pension crisis. Someone aged 55 today has a one in two chance of living to 90 and a one in four chance of living to 95, according to financial consultancy Watson Wyatt. By 2010 the number of pensioners will, for the first time, exceed the number of children in the population, according to the Office for National Statistics, and by 2031 there will be 40,000 people aged 100 or over, compared to just 300 in 1951. This poses a huge issue for retirement savings: there is an estimated 57 billion pound savings gap and the government warned again this week that people must increasingly shoulder the responsibility of providing financially for their own retirement. "When you ask people how long they think they will live, they generally say around 80," said Andy Briscoe, chief executive of Life Trust, which is equally backed by JP Morgan, RBS and US hedge fund DE Shaw. "It (growing life expectancy) seems to be one of the best kept secrets, certainly in the UK. "But until there are financial solutions that meet this need, our society is going to have a big issue to face in the future." Designed to complement traditional pension products, the longevity income plan is only available as a lump sum investment of between 5,000 pounds and 1 million pounds, making it geared to the "mass affluent" market. The plan must be taken out at least 10 years before holders want to start vesting the money -- a choice of either 75 or 80. Plan holders can choose from a range of nine funds that suit both high-risk and cautious investors. They are M&G Global Leaders, HSBC Investments FTSE 250 Index Tracker, Newton Managed, Jupiter Merlin Balanced Portfolio, New Star Managed Distribution, Gartmore Cautious Managed, Henderson Strategic Bond Fund A Class, Invesco Perpetual Monthly Income Plus, and JPM Cautious Total Return. Charges are an initial 5 percent and an average of 1.75 percent per annum. By Jennifer Hill Editing by Paul Majendie © Reuters 2008.