Illustrations from 6th April 2014
As if the changes in the recent Budget and new LTA are not enough, there are important changes to Key Features Illustrations from 6th April. While they seem to have gone under the radar the changes to Illustrations are equally important.
From 6 April, the maximum projection rates fall to 2%/5%/8%, down from the 5%/7%/9% rates we have seen for many years. In addition, new business projections pre-drawdown must take account of inflation at an assumed rate of 2.5% p.a. Mathematically this is not quite as simple as deducting 2.5% from the above rates (happy to explain to anyone who wants more detail) and what it means is that we are showing projections, and reductions in yield, based on a middle rate return of 2.4% p.a., and a lower rate of -0.5% p.a. and upper rate of 5.4% p.a.
As before, these are maximum rates and lower rates must be used if the investment potential of the product requires it, e.g. a cash investment. Also bear in mind that all the charges need to be deducted from these rates, and you can then see that the middle rate of growth taking account of the reduction in yield could be close to zero or even negative.
This is of course a real rate of growth in today's money, and there is a lot of sense in doing in that way, but whether that's fully understood by a client looking at a return close to zero is another matter! New business illustrations are going to look very different from now on.
For drawdown illustrations, we have the option of using real rates of return allowing for inflation, or the full rates ignoring inflation. We have opted to carry on using the full rates (now 2%/5%/8%), as rates net of inflation do not fit well with GAD rates and critical yields, which do not allow for inflation. We will be keeping a close eye on what the rest of the industry is doing, though, and making changes as appropriate.
Another change we are introducing, taking account of adviser feedback, is for advisers to choose the lower rate if they want to run an illustration at less than the maximum rates. You simply select the required middle rate (which must be less than the 5% maximum) and the system will adjust for this, with the lower and upper rates 3% each side of the middle rate.
Our calculation tools have now been updated in line with the new requirements and are available for immediate use.