Today’s climate: will it impact your retirement options?

5th April 2012

The law of unintended consequences is one of those special laws that impact in totally unexpected areas. In this case the Government’s attempt to maintain growth in the economy by its programme of Quantitative Easing (QE) has had an unintended and unwanted impact on pensions.

Pensions have been much maligned in many places – unjustifiably in my opinion – as they continue to represent an effective tax-efficient long term savings option for many people. However, the impact of QE has been severe and unexpected.

The final income one can draw from a pension fund is dependent on annuity rates; these are essentially a conversion rate from capital to income and are based on how long you are expected to live, and crucially, interest rates on Government Gilts. These Gilts are deemed to be a secure home for capital investments and pay a rate of return often called the ‘risk free rate’.

It is these rates that have been artificially depressed by the Government’s QE. This has a number of knock-on effects and requires attention by anyone at, or close to, retirement.

Essentially anyone retiring today is faced with income that is approximately 18% lower than this time last year. While we hope this reduction is only temporary, we have to recognise that there is a great deal of uncertainty about what will happen to Gilts in the future.

The fall in Gilt yields also affects those people who are drawing their pension under “Pension Drawdown”. In fact they have been hit twice-over. With a reassessment of longevity and a change in rules that together have knocked a further 20% off the maximum income allowance.

So what should anyone wanting to stop work do? There are few options:

  • Delay retirement. Things will be different in the future (although not necessarily better).
  • Shop around for best annuity purchase and check to see whether you qualify for enhanced rates based on health or lifestyle issues.
  • Look for alternatives. Drawdown pension, investment linked annuity and temporary annuity options all bring in some form of delay to the final decision but still allow for retirement now.
  • Retire but use other assets to supplement your income initially, rather than taking the pension.
  • Spend less. While this may not sound like a great plan it is always an option to consider.

In any event, it is increasingly important to receive independent unbiased advice from a professional. To see how we have helped our clients and how they have benefited from exploring the different options available, please see our case studies.

If you would like to speak to a trusted adviser about making your pension go further, please get in touch with the team at Fortitude Financial Planning.