We have just had a very enjoyable engagement with a Doctor retiring from General Practice who had been offered his retirement options.
"The gentleman I spoke to on the Mercer financial planning team told me that the percentage of doctors opting to place their fund in an ARF is in the high 90s."
So we projected an ARF taking exactly the same income as would be available under the scheme annuity option with the following results
We project a 33% success rate for the ARF. In other words, 2/3rd of the time we anticipate that the client would run down the account to zero value. Note that his life expectancy based data from the office of national statistics in the UK is shown in the top graph.
Not a pretty picture is it. But why?
Well it turns out that the scheme annuity rate is 4.8%pa (a similar open market option from Irish Life was just 2%pa) an ARF carries investment costs, so in order to match the guaranteed pension on offer from the GMS scheme, an ARF needs to provide a very high average annual return just to match the income forgone.
So, when we hear that an annuity isn't great value now and everyone (almost) is buying an ARF we have to be clear exactly what the annuity is actually offering.
In this case a relatively high guaranteed income and a spouses pension of 2/3rds of the member's pension.
I wonder how many of these doctors selecting the ARF option for their retirement savings for the whole of the rest of their lives actually appreciate this?
I also wonder why so many are encouraged to select an option which, on the face of it for many of them, might be the "wrong" option.
I also wonder if the conflict of interest presented by the commission payments from an ARF are clearly discussed here?
With our advice our client has secured a pension for life of €31,190 equivalent to an annuity rate of 4.835%pa with a 2/3rds Spouses Pension and discretionary inflationary increases.
There isn't a snowballs chance that he would have achieved this via an ARF with his low level of risk tolerance and relatively low risk capacity this is overwhelmingly the right course of action.
I wonder how many GPs have conducted such an analysis???