Focus on pensions
Falling Annuities
Interest rates are set to stay where they are for the foreseeable future. So, with the drop at the beginning of August to the base rate of 0.25%, savers will continue to struggle to earn any interest. The only people set to benefit are those with a mortgage linked to the interest rate. However, in the meantime, what happens to pension plans and annuity rates?
Gilt yields and interest rates are the two main factors in the calculation of annuity rates. With the former also taking a hit as the latter was lowered, and Brexit no doubt having an impact on both, the outlook doesn’t look great for annuities.
So in real terms what could the situation look like?
A 65-year-old male looking to retire now with a pension fund of £100,000, who wants to buy a level income that is guaranteed for 5 years, with a 50% widow’s pension, can expect an annuity rate of 4.5% per annum – £4,500. If he chooses to replace the 5-year guarantee with 100% widow’s pension for life, the rate falls to 4% or £4,000 per annum.
Is an annuity the best solution for you?
Possibly, but the message is it is imperative to seek professional advice. Locking into these all-time low annuity rates now may not be the right decision. Everyone’s situation is different and an annuity for one may not suit another. If your retirement lasts 25 years that is a long time to consider and so a thorough analysis by your Financial Adviser should take place.
Falling Gilt Yields
It’s not just annuities that have recently taken a hit. Falling gilt yields are also affecting final salary pension schemes.
As Gilt yields and interest rates fall, the scheme liabilities increase, which in turn means the pension scheme has to find more money to fund retirees.
Stock markets have recently rallied and therefore assets within final salary schemes, in the main, have grown. However, if market uncertainty returns and growth slows, the schemes assets may again come under pressure and fall.
Cash Equivalent Transfer Value
Deferred members in most circumstances can be offered a cash equivalent transfer value to move their benefits, and if accepted, take on personally the investment risk and forego the benefits secured within the scheme. For some this option is attractive, but in all cases we stress the need to seek Independent Financial Advice to ensure you are provided with all the options and considerations that are pertinent to your specific circumstances and needs.
We have always stated, pensions are complex and the rules and regulations change on a regular basis. Consulting with a qualified Independent Financial Advisor means you are protected with the advice given and they will explain the process and benefits to you.
Speak to our team
To speak to one of our Independent Financial Advisors regarding pensions please email [email protected] or call 01273 208813.
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Read some of our other stories here:
Do you truly know what’s happening to your pension?
Automatic Enrolment hits 200,000 mark, but still 1,000,000 to go
IEP Financial is authorised and regulated by The Financial Conduct Authority (FCA)
The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Advisor.
