Thousands of pensioners across the country have little hope of experiencing the retirement lifestyle they would have wished for due to low annuity rates.
Any chance of a comfortable pension pot may have crumbled as annuity rates fall and high inflation eats away at what little is left.
UK adults are living longer, working less and spending more. According to the Office for National statistics, two thirds of men and three quarters of women now reach the age of 75. With this in mind, it can be hard to see a viable way of planning for your future financially, especially in such a fragile economy.
Britain may be on the brink of another recession and there is not much that those edging towards retirement can do personally about the low interest rates and high inflation. However, there are some forms of financial protection against sudden falls in the value of investment funds.
The amount of annual pension someone can buy with their savings has been falling for some time and there is little sign of improvement, so is now a good time to take out a pension?
Gary Lee, of Mulberry Financial, told the BBC; “If you have retired, and have a pension that you have delayed, then there are lots of reasons why you might be best advised to draw it now rather than later.”
“Annuity rates are on a long term downward trend due to increased longevity [and] delaying your retirement, waiting for annuity rates to improve, has generally been a bad move for the last 10 to 15 years. All the while you delay, you are missing out on income that you could have had.î
Pensioners are being urged to shop around for the best annuity deals after it was recently revealed that some annuities have fallen by more than 4% in the last three months.
Compare pensions with Money Expert.
How has this happened?
Annuities are based on gilts and corporate bonds. One of the effects of the Bank of Englandís £75 million cash injection into the economy, via quantitative easing, is that it could drive the yields on gilts to fall. If the yields on gilts fall, the income paid from an annuity will also fall. Currently, gilt yields are operating at the lowest levels since WW2, having a direct impact on annuity rates.
Since June, conventional annuity rates have crashed by 4.15%. This means that a man with a £50,000 retirement sum would have an average yearly income of £3,239 on one of the best standard annuities. However, on one of the worst annuities on offer, his annual income would drop to £2,831.
Leaving pension pots invested in equity or tied up in managed funds up until the point of retirement is a high risk venture. It would be advisable to switch to a safer method in the run up to retirement. This is known as ëlifestylingí, it is a feature of defined contribution (DC) pensions whereby it slowly increases the amount you have in lower risk accounts. This means shifting away from volatile markets and equity based funds to fixed interest or cash in the three to four years immediately prior to retirement.
What to do next?
There are many pros and cons as to whether or not it is actually worth having a pension scheme at all. Some experts say that a pension is the most efficient way of securing your financial future. It is also considered the most effective way to build up a large sum of savings for later in life.
Others say that the only way you will be able to make full use out of a pension pot is if your employer matches your personal contributions to a pension scheme, or if you are in a final salary scheme.
Consider your options; if you are contributing to a pension pot you could enjoy a generous tax break. . Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, recently told The Guardian; ìEvery £80 you pay in gets rounded up to £100. If you are a higher rate taxpayer you can claim a further £20 on top. And your money grows largely tax free.î
One of the other benefits is that up to 45% of your pension fund can be passed on to your children should you pass away.
However, there are alternatives. Katherine Oxenham, Business Development Director at Annuity Direct, said; “The rules are always changing, so don’t throw all your eggs into one pension and expect to have your retirement sorted.
ìPlanning for retirement needs to be an active process, something you take a keen interest in on a regular basis. Pensions aren’t everything ñ other forms of investment such as cash, National Savings, bonds and ISAs all play an important part too, as can property investment.î