Taking stock of the pension path ahead
With annuity rates falling by up to 5.2% this month, even die-hard annuity loyalists will find it hard not to agree that the outlook for annuity rates is bleak.
Essentially, post-Brexit, S&P downgraded the UK’s credit rating from AAA to AA causing 15-year gilt yields to drop some 20 basis points and annuity rates to plummet.
On 4 August, UK interest rates were cut from 0.5% to 0.25% - a record low; the Bank of England has not yet signalled further rate cuts but more quantitative easing may be imminent. The financial planning sector has therefore been swiftly cautioning clients to take stock of the economic situation before committing to major decisions with regard to their retirement income.
There is no doubt that we have our work cut out for us as we try to restore some confidence in people who were on the brink of purchasing an annuity because they believed gilts to be a relatively safe haven.
These more risk-averse clients also wanted to avoid the charges associated with keeping a pension invested via income drawdown. Now, they are faced with the possibility that drawdown is in fact a potential key contender in their reworked retirement strategy.
They may of course defer annuity purchase by going into drawdown until interest rates rise again. But, the economic outlook is unknown and there is no crystal ball to determine interest rate movements so there is no telling how long they would be in the drawdown arrangement.
To continue with the purchase of an annuity, would-be retirees must of course gauge whether they can afford to make increased contributions to their pension in order to offset the fall in annuity rates. This could prove highly expensive and for those that can afford it, it may not even be an option due to the Government’s unpopular decision to impose reductions to the lifetime allowance (LTA).
Planners with clients retiring now need nerves of steel as there is no clear respite ahead. The workplace pension is still in its formative stages and it will be some time before pension minister, Richard Harrington, can reveal which pension reforms he will run with.
There is perhaps some comfort to be taken from Theresa May’s words at a Politia think-tank in 2009 when she was Shadow Secretary of State for Work and Pensions: “We must view pension funds as precious resources for the future, not goldmines to be raided by government for tax revenue”.
Government is telling us that it supports savers and that it is committed to the pension simplification reforms. Post-Brexit, we must perhaps muster some faith that the new policymakers will indeed stay true to their rhetoric.