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MetLife guaranteed products any good?

Financial Advice | General Helpful? 33

Asked by Highwall, submitted 24 March 2011.

Open Quote What is your view on met life guaranteed products? How does it work and who provides the guarantee?End Quote

Answered by Justin on 25 March 2011

MetLife's guaranteed products work by investing your money in one of three index-tracking funds (which, to varying degrees, split your money between stock markets and fixed interest) and then applying capital guarantees to those funds every one or two and a half years. The idea is they protect you from losing money and help 'lock-in' gains as you go along.

To explain this more clearly let's take a look at MetLife's guaranteed pension plan - The Retirement Portfolio. This is a personal pension that offers access to the above guaranteed funds, both pre-retirement and during retirement when you're drawing an income - this is referred to as the 'Secure Capital' option. You can also opt for a 'Secure Income' option during retirement which guarantees a minimum level of income while leaving your money invested.

So, suppose you're 50 now and plan to retire at 65. You could transfer your pension(s) into MetLife's Retirement Portfolio and choose one of the Secure Capital funds. This means your pension fund will grow based on performance of the chosen fund and you can elect to lock-in any growth each year (capped at 10%) or every two and half years (uncapped) to give a new minimum fund value guarantee. At each 'lock-in' date, your guarantee will be the greater of the previous guarantee and current fund value - and the guarantee itself applies when you reach retirement after 15 years at age 65..

For example, you invest £100,000 and opt for the annual lock-in. After a year the fund has risen 15% in value, so your minimum guarantee rises to £110,000 (because it's capped at 10%) and the fund is worth £115,000. The fund the falls gradually over the next few years to £90,000 (so guarantee remains £110,000) until rising again to 110,000 in year 7. Over the next year the fund rises by 5% to £115,500 and your guarantee rises to the same level...and so on until year 14 when your fund is valued £150,000 and the guarantee is £140,000. The market crashes in the final year and your fund falls to £120,00 - but you'll have a £140,000 pension fund at retirement thanks to the guarantee.

The secure income option promises a fixed minimum rate of income (dependent on your age) for life while allowing you to leave the money invested under the secure capital option. In the above example the income rate for a 65 year old is 4.25%, so you'll receive 4.25% of £140,000, £5,950 a year. The income is deducted from your fund, but is based on the 'Secure Income Base, which is the greater of your initial investment at retirement (£140,000 in this example) and the fund value at every 'lock-in' review. So, if you fund falls you'll just receive based on the guaranteed £140,000, but if it rises you'll receive 4.25% of the new guaranteed amount.

If you die under the secure income option, the death benefit is the greater of your fund value or initial investment less income taken.

This all sounds pretty good, so what's the catch? In a word - charges.

The problem with investment protection is that it costs. And the cost could end up outweighing any benefit.

In the above example, you'd pay an annual pension charge of between 0.5% and 0.7% (depending on amount invested). You'll also pay between 0.5% and 1.95% a year for the secure capital index funds (the shorter the period guaranteed, the higher the cost). And on top of this there'll be fees or commissions for financial advice. So, if you want protection over 10 years on the conservative index fund (I can't really see the point in buying protection for longer periods) on a £140,000 pension pot you'll pay a 0.7% annual pension fee, fund charges of 1.95% and probably IFA commission of 0.5% - total annual charges of 3.15%. This is a colossal amount and if we assume 6% annual returns before charges they'll wipe out over half your investment growth.

You might beg to differ, but I just don't see the point of paying such high fees for protection. You could get similar funds (without protection) within a stakeholder pension or low cost SIPP for well under 1% a year.

The secure income option in retirement could, in theory, make more sense if you'd like to draw income from your pension rather than buy an annuity. The MetLife route should prevent you from running out of cash to pay a lifetime income.

But compare the 4.25% for a 65 year single life income to current level annuity rates of around 5.5% and you're around 1.25% a year worse off. Yes, your pension fund could grow, in which case so could your income, but I think the chances of this are fairly slim after income and charges are deducted.

Under the secure income option protected fund charges reduce to between 0.55% - 1.55% (depending on fund chosen) but add in the annual pension charge and adviser commission and you'll still probably be paying over 2% a year in charges while being invested in fairly cautious funds.

The guarantee is provided by MetLife as far as I can see, so if they fail the guarantee fails. In the event of default you should be covered by the Financial Services Compensation Scheme for 90% of what you're owed with no upper limit.

In summary, I don't particularly like these types of product. I guess they have their place and some people may well be quite happy to pay for the peace of mind that protection can bring. But the cost of protection is so high on periods of around 10-15 years I'd rather take a bit of sensible risk and pocket the savings.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (2) - To post a comment please register or login .

Comment by gbongers at 10:18pm on 26 Oct 2011:

Not sure I completely agree with this review.

I'm currently 60 and plan to retire at (around) 65, therefore I need a private retirement plan that gives me the flexibility to make that decision at anytime, whilst giving me a level of certainty regarding my retirement income (I'm a healthy man, and don't want to annuitise my fund just now).

What has been made clear to me by my financial adviser is that, with any other personal retirement plan, I would have an element of risk to my fund value (as markets go up and down) and also an element of risk to the amount of income my fund could eventually buy me (annuity rates and GAD figures can go down).

I have therefore decided to take his advice and take up the MetLife Secure Income retirement plan. Effectively, the amount of income my fund can eventually buy me is guaranteed to grow by a minimum of 3% per annum net of all charges. My fund will still be affected by volatility, but when this is positive returns, the plan can lock-in the investment growth, thus increasing my income (which, again, is guarantee by MetLife).

Best of all, I have the flexibility to retire at any time, or move to a better contract if something more suitable comes onto the scene.

All in all, I am happy with this arrangement, as it gives me the security of knowing a minimum outcome at retirement in an otherwise "confusing" investment climate.

G Bongers

Comment by justin at 6:55pm on 26 Jul 2012:

Glad to hear you're happy with the product and feel it suits your needs. Yes, it gives you flexibility on when to buy an annuity, if ever, (although you could hold cash in a conventional pension if you want security) but the income rate is still likely to lag a conventional annuity (unless annuity rates crash). Annuity rates wil likely start at a higher level and also increase by around 2-4% a year until purchase (ignoring underlying market rate movements) due to your increasing age.

I remain unconvinced these products are the panacea some believe.