Here’s one for Miss Marple fans. The new Longevity Income Plan being launched by Life Trust, with the backing of JP Morgan, RBS and hedge fund D.E. Shaw, has more than a little in common with the product that inspired Agatha Christie’s 4.50 from Paddington. In that novel, the grandchild who manages to live the longest inherits a huge estate, under an unusual form of will called a tontine. This leads, unsurprisingly, to one murder after another, as each grandchild competes for the takings. This type of scheme, where everyone pays in but the last one living scoops the pool, was banned in the UK in the 1800s, but the principles now appear to have been resurrected by the new Life Trust plan.
The scheme is designed to play on fears that we might outlive our savings in old age. Thanks to modern medicine, fewer manual jobs and improved nutrition, average longevity is undoubtedly on the up. Someone aged 55 has a one in two chance of living past 90, says consultancy Watson Wyatt, and a one in four chance of living to 95. That’s a long time to be trying to pay the bills, let alone fund the odd round of golf or those hard-earned exotic holidays.
Under a traditional annuity, regular contributions made while you are still working are invested on your behalf to fund an income (typically modest and often fixed) in retirement. By contrast, the Life Trust starts paying out from a much later age – currently either from 75 to 95 or from 80 to 100. The minimum investment is £5,000, which needs to be paid in at least ten years before the plan begins.
The twist is that once your payments begin, there’s an annual uplift for those still living as other policyholders die. As you live to accumulate these ‘birthday units’, your income keeps rising. For example, someone who invests £50,000 when they are 50 in the “80 to 100” plan could receive £19,600 a year when they hit 80 (based on investment returns of 7%), rising to £30,600 by the time they were 90 and £257,000 at 100. So, is it a no-brainer?
Far from it. Skeptics point out that far from being revolutionary, this is just a traditional annuity that starts paying out at an older age. And it’s not cheap – expect a fee of 5% of any lump sum paid in, followed by annual charges of 1.75% a year. It’s also plainly daft for anyone in poor health. £50,000 invested at age 50 at 7% would have turned into well over £300,000 by the time you were 80, but die the day before your 80th birthday, as The Guardian’s Tony Levine points out, and your heirs would only get the initial £50,000 back. Of course, should you manage to beat the “longevity odds” (average UK males are forecast to get to 82.7 by 2031) by reaching 100, “you will gain a fortune” – but do you really want to gamble with your pension?