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PENSION PORTFOLIO FUNDS GUIDE TO NEW RETIREMENT INCOME OPTIONS This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.

BRAND CHECKED (INITIALS

OPERATOR CHECKED Initia Date

Guide to New Retirement Income Options

PAGE 2

WHAT IS COVERED BY THIS GUIDE? PAGE 3

FUNDS AT A GLANCE PAGE 5

THE BACKGROUND PAGE 7

CHARGES PAGE 8

SCOTTISH WIDOWS INVESTMENT APPROACHES PAGE 9

FUND INFORMATION, AIMS AND RISKS

1

Guide to New Retirement Income Options

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WHAT IS COVERED BY THIS GUIDE?

*Pleas

Pensio it has longer

However, the main reason we have added these new funds, is to offer low-cost, simple investment options that could potentially provide sustainable income for drawdown customers.

Scottish Widows has added three new ‘multi-asset’ funds to its existing Pension Portfolio range: Pension Portfolios A, B and C. These new funds blend equities and bonds in different proportions, and at competitive prices. We have also added Pension Portfolio Five as a ‘Money Market’ fund, designed as a low-risk option for short-term investment.

All the Pension Portfolio funds are available both pre and post retirement, and your clients can also select from other funds from the Scottish Widows pension fund range: please contact us for more information.

Scottish Widows has launched these new funds to help you meet your clients’ needs in the new pensions environment. Many of them could be looking to invest in diversified, multi-asset funds that suit their attitude to risk and are competitively priced. Pension freedoms give your clients much more flexibility in retirement, including the option to take some of their pension pot as a cash lump sum and leave the rest invested, or perhaps take a regular and sustainable income.

This guide gives details about the new funds and background on why we have launched them, including the modelling carried out by independent experts Moody’s Analytics to help us design them.

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Guide to New Retirement Income Options

FUNDS AT A GLANCE The table below shows the asset allocation for our new Pension Portfolio funds: Asset Type Cash*

Scottish Widows Pension Portfolio 5

Scottish Widows Pension Portfolio C

Scottish Widows Pension Portfolio B

Scottish Widows Pension Portfolio A

100%

Corporate Bonds

70%

50%

40%

Overseas equities

21%

31%

37.2%

Emerging Markets equities

–

4%

4.8%

9%

15%

18%

UK equities

The asset allocation and percentage holding within each fund may change over time. *Please see below for our explanation of cash in this context. Pension Portfolio Five is a low risk option compared to other investment solutions in this guide, but this also means it has significantly less potential for growth. It is designed as a low-risk fund for the short term, rather than a longer-term investment solution. PENSION PORTFOLIO 5

100% Cash

Scottish Widows Pension Portfolio 5 invests in ‘Money Market’ assets, also referred to as ‘cash’ and ‘near cash’ securities*. It has been designed as a possible investment solution for investors who only want to remain invested over the short term and are looking to take a number of cash payments over two years or so (possibly to optimise tax benefits through using personal allowances or remaining in lower tax bands). This means this fund could suit those who are planning on keeping their pension pot invested for only a couple of years and would prefer not to take a significant level of risk.

Scottish Widows Investment Approach CAUTIOUS

Please see page 11 in this guide for details of the Fund’s aim and investment risks. Please also see page 8 for more information about the Scottish Widows Investment Approaches. *Scottish Widows Pension Portfolio Five invests in ‘Money Market’ assets, also referred to as ‘cash’ and ‘near cash’ securities. A ‘cash fund’ may hold different types of ‘cash-like’ investments that have similar characteristics to bank deposits – such as a fixed rate of interest, quick access and low risk of capital loss. Cash funds mainly hold investments that mature (i.e. pay out) in the short term (weeks), but can hold assets with slightly longer periods to maturity. A longer period to maturity often means the fund manager is trying to earn a slightly higher return by taking a little more risk, which leads to the potential for slightly higher returns and risks than a bank deposit account. The fund will fluctuate in value because of, among other things, charges and possible falls in interest payments, so investors can get back less than they invest. There is also the risk that this type of fund will not keep pace with inflation, which would mean the investment’s spending power is reduced. The value of an investment can go down as well as up, and could fall below the amount(s) paid in. This also applies to funds which invest in ‘cash’ and ‘near-cash’ investments, as these can fluctuate more than an investor might expect. Therefore these funds do not guarantee a positive return, nor do they provide complete protection for an investment.

3

Guide to New Retirement Income Options

Follow their p

Here are the new ‘multi-asset’ Pension Portfolio funds described in turn: PENSION PORTFOLIO C 30% 70% Bonds

Equities

Scottish Widows Pension Portfolio C is the most cautious of the new multi-asset funds, with a strategic assetallocation at outset of 70% Corporate Bonds and 30% Global Equities. It is likely that an investment in this fund will be subject to less volatility than in funds with more equities, but this means that the chances of an investment growing significantly are also a lot less, even when the stockmarket is rising strongly. The overall risk level, measured by volatility, is lower than would be expected for a fund with higher equity content.

Scottish Widows Investment Approach BALANCED

1. An

2. Pe

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3. Fle

Ac

The Sc unsure wish t

Please see page 10 in this guide for details of the Fund’s aim and investment risks. Please also see page 8 for more information about the Scottish Widows Investment Approaches.

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In sum PENSION PORTFOLIO B

50%

50%

Bonds

Equities

Scottish Widows Pension Portfolio B has a strategic asset allocation at outset of 50% Corporate Bonds and 50% Global Equities. This means that the potential for growth is increased, but that also means anyone investing in this fund should be comfortable with slightly more risk. The fund is more likely to be affected by market volatility than Pension Portfolio C, but less likely to be affected by market volatility than Pension Portfolio A.

Scottish Widows Investment Approach BALANCED

60%

Bonds

40%

Equities

Scottish Widows Pension Portfolio A is the most risky of these new funds, with a strategic asset-allocation at outset of 40% Corporate Bonds and 60% Global Equities. Therefore this fund may suit those who are relatively comfortable with risk and volatility, and wish to increase the chances of their pension pot growing. However, this also increases the chances that their pot size could reduce, which would lower their potential income and ultimately mean it could run out if the investments underperform or experience significant volatility.

fro up

Scottish Widows Investment Approach PROGRESSIVE

Please see page 11 in this guide for details of the Fund’s aim and investment risks. Please also see page 8 for more information about the Scottish Widows Investment Approaches.

4

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2. W

Please see page 10 in this guide for details of the Fund’s aim and investment risks. Please also see page 8 for more information about the Scottish Widows Investment Approaches. PENSION PORTFOLIO A

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h

Guide to New Retirement Income Options

THE BACKGROUND Following changes introduced in April 2015, investors in UK pensions now have much more flexibility over how they can use their pension pot at age 55 or above to provide for their retirement. They could choose from the following: 1. Annuity Purchase – buying one or more annuities to provide a secure income. 2. Pension Encashment – taking all (or part of) a pension pot as a cash lump sum, 25% of which will be tax-free with the

remainder subject to tax. 3. Flexible Access – adopting a flexible approach by using a suitable product (like the Scottish Widows Retirement

Account) to keep a pension pot invested and then drawing down income as it’s needed. The Scottish Widows Retirement Report 2014 indicated that as many as 4 in 10 customers who responded were either unsure of their exact plans or wanted to go into drawdown. In both scenarios, it is likely that many of these customers will wish to remain invested and potentially go into drawdown, either straight away or in the future. To help you meet this challenge, Scottish Widows invited Moody’s Analytics to help us review our retirement proposition in light of the new pension freedoms. A key objective was to assess what we need to offer customers who have decided to access some of their pension, to help them achieve what they want without taking more risk than they’re comfortable with. In summary, our research with Moody’s indicated the following: 1. Holding less than 30% of an investment in equities could jeopardise the chances of sustaining a set income for

10 years or more in retirement. Whilst equities are more risky than some other assets, our research indicated that investing a proportion of a pension pot in equities may be required to help deliver investment returns. This helped us to identify the asset allocations we have added to our range for customers who want to take a regular income. 2. Withdrawing a relatively low level of income (somewhere in the region of 3 to 4% of a total pension pot each year)

from an investment in a lower risk fund may be the most reliable way to withdraw a regular and sustainable income up to the age of 85. However, this approach would lower the potential for any significant investment growth. 3. If a customer wants to withdraw higher levels of income (say around 5% to 6% of their initial pension pot each year),

our analysis with Moody’s suggests it becomes slightly more likely that they could sustain this level of income to age 85 if they invest in one of the funds that has a higher equity content. However, they would need to be aware that exposing their investment to greater risk also increases the potential downside if investments were to fall in value. Looking at this in more detail, Moody’s provided analysis to support the design of new investment solutions that reflect a range of retirement choices or liability profiles. They set up a quantitative analysis framework that reflected the particular liability profiles specified by Scottish Widows, which included: • A detailed set of liability profiles that capture different at-retirement behavioural assumptions for pension investors. • Quantitative risk metrics for each liability profile according to Scottish Widows’ specific requirements. • An overall set of cashflow and investment term assumptions for various investor paths. • Modelling to assess the likely outcomes based on retirement income from 3% to 6% per annum. Using this approach, Scottish Widows and Moody’s explored a wide range of in retirement portfolios, not just the lowest risk option. In particular, we explored the relationship between drawdown income/withdrawals, risk asset allocation and sustainability of retirement income. This included analysis of in-retirement portfolios with equity allocations ranging from 30% to 70%.

5

Guide to New Retirement Income Options

The key findings were: • For income strategies from 3% - 5% income, and for those who are holding off making a decision on retirement income, a retirement portfolio with 30% equity content provides the lowest risk in terms of residual annuity income* of all the portfolios considered. • But in looking at income sustainability, there is a ‘turning point’ in terms of income drawn between 5% and 6%, beyond which it becomes less risky (from a sustainability perspective) to hold a higher equity allocation. • For lower incomes, holding more equity does appear to increase residual pot size* without significantly increasing risk (although investors should be aware of the potential impact of year on year volatility). • Overall, the analysis suggests that a suitable range of in-retirement portfolios might be from 30% to 70% equity. *The modelling assumed an investment from 65 throughout retirement to age 85, at which point the customer would purchase an annuity. See the notes below for full details of all the assumptions used. Here are the figures behind this, mapped against our three new Pension Portfolio multi-asset funds. The table shows the likelihood of providing a sustainable income, comparing different equity contents for various percentages of the initial investment: Probability of sustaining an income

The Pe

Fund

Scott Portf

Scott Portf

Scott Portf

Fund

3% pa

4% pa

5% pa

6% pa

Pension Portfolio A (60% equities)

99%

96%

83%

61%

Pension Portfolio B (50% equities)

100%

97%

86%

60%

The fig our cu

Pension Portfolio C (30% equities)

100%

99%

89%

51%

For a b perfor

Moody’s Analytics conducted post retirement analysis for Scottish Widows in 2014. This analysis needed to use a specific term, so we used the 20 year period between 65 and 85. The scenarios and assumptions used are summarised in the bullet points below:

Scott Portf

1. Th

a) th b) if

• A 25% tax-free cash withdrawal at age 65. • The balance of the pension pot invested throughout retirement to age 85. • Fixed annual withdrawals calculated as a proportion of the pension pot at retirement. • A secure income is arranged by using the remaining pension pot to purchase an annuity at age 85, at prevailing rates. • The fund’s returns are gross (no fund charges or product charges taken into account) and withdrawals are level (so are not rising with inflation). • No allowance has been made for charges in these calculations.

c) if d) if

The M and al

Other can ch

Please note that our fourth new fund, Pension Portfolio Five, is a lower risk ‘Money market’ fund. This fund is designed as a low risk fund for the short term, rather than a longer-term investment solution.

If any

Customers who are looking to take an income via drawdown will need to go into Retirement Income through the Scottish Widows Retirement Account. It’s important that they understand the impact of taking income from an investment. The funds covered in this guide are not guaranteed. If a customer takes too much risk their investment could fall significantly in value, which would reduce its ability to provide an income.

3. Ot

Everyone’s circumstances and needs are different. High levels of income may not be sustainable and in some cases could reduce the value of a pension pot to zero. This might have an impact on your client’s overall income in retirement.

5. Th

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as a statement of fact, nor should they be relied on when making investment decisions. Past performance is not a reliable indicator of future results.

6

2. Fo

th

4. Fu

Guide to New Retirement Income Options

CHARGES

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d

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The Pension Portfolio funds’ Total Annual Fund Charges for the four Scottish Widows pension series are as follows: Fund name

Total Annual Fund Charge Original series

Series 2

Series 3

Series 4

Scottish Widows Pension Portfolio A Pension Fund

0.875%

1.000%

1.000%

0.100%

Scottish Widows Pension Portfolio B Pension Fund

0.875%

1.000%

1.000%

0.100%

Scottish Widows Pension Portfolio C Pension Fund

0.875%

1.000%

1.000%

0.100%

Scottish Widows Pension Portfolio Five Pension Fund

0.875%

1.000%

1.000%

0.100%

The figures above are the Total Annual Fund Charge: rebate and charging processes have been implemented to ensure that our customers incur no additional expenses or charges from any underlying funds. For a breakdown of our fund series by policy type, please see the Scottish Widows Adviser Extranet Factsheets, prices & performance page: http://www.scottishwidows.co.uk/extranet/funds/factsheets-prices-performances 1. The Total Annual Fund Charge of a fund is the sum of: a) the Scottish Widows Annual Management Charge, b) if applicable, an External Fund Management Charge, c) if applicable, a Multi-Manager Fund Management Charge, and d) if applicable, an allowance for any Other Expenses.

The Management Charges of a), b) and c) above cover fund management, administration, marketing and the cost of sales, and also for c) the multi-manager selection service. Other Expenses include, for example, trustees’ fees, auditor’s fees and regulators’ fees. The allowance for Other Expenses can change on a regular basis. If any of a) to d) above changes for a fund, the Total Annual Fund Charge for that fund will also change. 2. For unit-linked funds the Total Annual Fund Charge is reflected in the prices of each unit. 3. Other product charges in addition to the Total Annual Fund Charges will apply. This guide should be read together with

the relevant product literature, including any Key Features illustrations. 4. Full terms and conditions are available on request from Scottish Widows. Charges, terms and limits may change. 5. The Total Annual Fund Charges are those current at the time of going to print.

e

7

Guide to New Retirement Income Options

SCOTTISH WIDOWS INVESTMENT APPROACHES While there are a number of ways to evaluate risk, Scottish Widows uses the following definitions to help you decide on an appropriate investment approach when choosing a Pension Portfolio Fund.

SECURE

CAUTIOUS

BALANCED

PROGRESSIVE

ADVENTUROUS

SPECIALIST

These investments provide safety to the amount invested and can be expected to offer relatively low growth over the medium to longterm. They cannot fall in actual value, but can fall in ‘real’ value due to the effects of inflation.

These investments are expected to have a relatively modest risk to the capital value and/ or income. They have the potential to provide income, and/or, over the medium to longterm, relatively modest capital growth. The capital value may fluctuate, although some products may offer an element of capital protection.

These investments carry a risk of loss to capital value but have the potential for capital growth and/or income over the medium to long-term. Typically they do not have any guarantees and will fluctuate in capital value.

These investments are expected to have a relatively significant risk of loss to capital value, but with the potential of relatively more capital growth over the medium to long-term. They do not offer any guarantees and will fluctuate in capital value.

These investments carry a relatively much higher risk of capital loss but with the potential for relatively higher capital growth over the medium to longterm. They may be subject to a considerable level of fluctuation in capital value. They do not offer any guarantees.

These investments carry a very high risk of capital loss, but with the potential for a higher return over the long- term. They are very volatile and are only suitable for clients who can afford to, and are prepared to, risk the entire capital value. They do not offer any guarantees.

CAUTIOUS

BALANCED

PROGRESSIVE

ADVENTUROUS

SPECIALIST

SECURE

INCREASING RISK

The Sc combi

A prop The Sc open-e

Some reduce It is no descri

The in

Full te

The va curren

There restric

We res more t in the circum the rel

Where the fo EQ

We categorise investment periods as follows: Short-term: up to 5 years, Medium-term: between 5 and 10 years, Long-term: over 10 years. Please be aware that we review these investment approach definitions and the investment approach for our funds regularly, so these may change. You can find information on current investment approaches and notification of any changes at www.scottishwidows.co.uk/investmentapproaches

FI

OS

8

n an

ALIST

estments ry high ital with the or a urn over erm. ery d are ble for o can and are o, risk capital y do ny s.

ALIST

Guide to New Retirement Income Options

FUND INFORMATION, AIMS AND RISKS The Scottish Widows unit-linked funds aim to provide long-term growth in the price of units. This is generated by a combination of capital growth as well as income that is added to the fund. A proportion of each unit-linked fund may be held in cash to provide liquidity or while awaiting suitable investments. The Scottish Widows unit-linked funds can invest in other unit-linked funds or in collective investment schemes (for example open-ended investment companies (OEICs) or unit trusts) to achieve exposure to meet the stated fund aims. Some funds may use derivatives (contracts which have a value linked to the price of another asset) to help reduce risk or reduce cost, or to help generate extra capital or income. This is normally referred to as Efficient Portfolio Management (EPM). It is not intended that this will cause the risk profile of these funds to change, but using derivatives might not achieve the described outcomes and may result in greater fluctuations in the values of these funds. The individual aims of the Scottish Widows pension funds covered in this guide are shown on the following pages. Full terms and conditions are available on request from Scottish Widows. Charges, terms and limits may change. The value of your client’s investment is not guaranteed and can go up and down depending on investment performance (and currency exchange rates where a fund invests overseas), and your client may get back less than they invested. There may be restrictions on the amount your client can invest in certain funds. Please contact us for details of any restrictions that apply. We may change the selection of funds that we make available. We reserve the right to delay a request to sell your client’s units in certain circumstances. The period of delay will not be more than six months if the units to be cancelled include units which relate to a fund which holds directly or indirectly assets in the form of real or heritable property. It will not be more than one month in all other cases. This may happen in exceptional circumstances where, for example, there is an unusually high demand for units to be cashed in. For more details please see the relevant Policy Provisions for your client’s investment with us. Where any of the following general risks apply to a fund, they will be indicated beside the aims of the fund shown in the following table. Any specific risks associated with a fund will also be shown here. EQ

FI

OS

This fund invests in company shares (often referred to as ‘equities’). Investing in company shares generally has the potential for higher capital growth over the longer term than investing in say, corporate bonds and other fixed interest securities. However there might be considerable fluctuations in equity prices and there is a greater risk that the value of the investment will fall. Some of the securities in which this fund invests might default or their credit rating might fall. The value of those investments will usually fall should an issuer default or receive a reduced credit rating. Fluctuations in interest rates are likely to affect the value of the securities held by the fund. If long-term interest rates rise, the value of the units is likely to fall and vice versa. Exchange rate changes might cause the value of any overseas investment to go up or down.

9

Guide to New Retirement Income Options

OUR PENSION PORTFOLIO FUND AIMS

Fund

Fund

Aim

Risks

Scottish Widows Pension Portfolio C Pension Fund

The Fund aims to provide long-term growth by investing primarily in fixed interest securities, but with a significant proportion in UK and overseas equities.

EQ

OS

Scott Portf FI

The underlying funds will use full replication or sampling techniques to track an index. The exposures are currently gained through holdings in the following funds: SSgA UK Equity Index Fund SSgA Europe ex UK Equity Index Fund SSgA North America Equity Index Fund SSgA Japan Equity Index Fund SSgA Asia Pacific ex Japan Equity Index Fund SWUTM Corporate Bond Tracker Fund The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interests to do so. This means in future the Fund could be invested in different funds and additional asset types, though the Fund will continue to invest primarily in fixed interest securities.

Fund

Aim

Scottish Widows Pension Portfolio B Pension Fund

The Fund aims to provide long-term growth by investing in a balance of UK & overseas equities and fixed interest securities.

Fund

Risks EQ

OS

FI

Scott Portf

The underlying funds will use full replication or sampling techniques to track an index. The exposures are currently gained through holdings in the following funds: SSgA UK Equity Index Fund SSgA Europe ex UK Equity Index Fund SSgA North America Equity Index Fund SSgA Japan Equity Index Fund SSgA Asia Pacific ex Japan Equity Index Fund SSgA Emerging Markets Equity Index Fund SWUTM Corporate Bond Tracker Fund The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interests to do so. This means in future the Fund could be invested in different funds and additional asset types, though the Fund will continue to invest in a balance of equities and fixed interest securities.

10

We ma invest

Guide to New Retirement Income Options

Fund

Aim

Risks

Scottish Widows Pension Portfolio A Pension Fund

The Fund aims to provide long-term growth by investing generally in a range of UK and overseas equities, as well as a proportion in fixed interest securities.

EQ

OS

FI

The underlying funds will use full replication or sampling techniques to track an index. The exposures are currently gained through holdings in the following funds: SSgA UK Equity Index Fund SSgA Europe ex UK Equity Index Fund SSgA North America Equity Index Fund SSgA Japan Equity Index Fund SSgA Asia Pacific ex Japan Equity Index Fund SSgA Emerging Markets Equity Index Fund SWUTM Corporate Bond Tracker Fund The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interests to do so. This means in future the Fund could be invested in different funds and additional asset types, though the Fund will continue to invest generally in equities.

Fund

Aim

Risks

Scottish Widows Pension Portfolio Five Pension Fund

The Fund aims to provide high levels of capital security by investing mainly in high quality short to medium term securities. These include fixed or floating rate debt instruments such as deposits, commercial paper, medium term notes, asset backed securities and bonds.

Specific risk Some of the securities in which this Fund invests might default or their credit rating might fall. The value of those investments will usually fall should an issuer default or receive a reduced credit rating. Fluctuations in interest rates are likely to affect the value of the securities held by the Fund. If interest rates rise, the value of the units is likely to fall and vice versa. The Fund therefore carries a relatively modest risk to capital.

The exposures are currently gained through holdings in the following funds: Aberdeen Sterling Investment Cash Fund Aberdeen Global Liquidity Fund – Sterling Sub Fund The asset mix of the Fund will be reviewed periodically by Scottish Widows, and may be amended if a review indicates that it would be in the investors’ best interests to do so. This means in future the Fund could be invested in different funds and additional asset types, though the Fund will continue to invest mainly in short to medium term securities.

We may change the selection of funds that we make available. There may be restrictions on the amount that can be invested in certain funds. Please contact us for details of any restrictions that apply.

11

Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655. 54949  12/15