It seems that on a regular basis there are articles and information provided suggesting how awful our pension income system is – I am an investment IFA specialising in tax planning. My opinion is different.
My opinion – changes in legislation and regulations have made the arrange more flexible. (This is to an extent never seen before). Yes, Gilt Yields are low and this is a major factor in determining annuity rates and yes, compared to the past the returns achieved are low – but so are the factors creating the environment for higher rates.
A key factor is inflation – we recently saw rates hit 3.6% only a few months ago but they have fallen back in more recent times. On a historical basis these rates are very low. Annuity rates were much higher, at a time when inflation was also much higher. So we have been a victim of the success of monetary policy controlling the rate of inflation. The figures around annuities and inflation have moved maybe no quite in tandem but there has been a very strong correlation.
There again part of what determines the value of Gilts is inflation, especially level Gilts where inflation (and future expected inflation) is clearly an important factor affecting the pricing i.e. if everything is going up in price and the rate of this increase both known and expected has an effect on the value of assets with known returns.
So let’s have a look at the actuals:-
| Gender |
Age |
Escalation |
Guarantee |
Purchase Price |
Expected Annual Payment |
| Male |
55 |
Level |
None |
£100,000 |
£4,750 |
| Male |
60 |
Level |
None |
£100,000 |
£5,250 |
| Male |
65 |
Level |
None |
£100,000 |
£5,950 |
| Male |
70 |
Level |
None |
£100,000 |
£6,700 |
| Male |
75 |
Level |
None |
£100,000 |
£7,900 |
| Gender |
Age |
Escalation |
Guarantee |
Purchase Price |
Expected Annual Payment |
| Female |
55 |
Level |
None |
£100,000 |
£4,650 |
| Female |
60 |
Level |
None |
£100,000 |
£5,050 |
| Female |
65 |
Level |
None |
£100,000 |
£5,700 |
| Female |
70 |
Level |
None |
£100,000 |
£6,300 |
| Female |
75 |
Level |
None |
£100,000 |
£7,350 |
The above figures were provided through find.co.uk and have been rounded down to provide a guide estimated price rather than actual terms. The basis was a simple level lifetime annuity with no additional benefits.
So the question is – in an environment where interest rates offered, say a 5 year fixed rate bond typically pays arround 4.0% AER and the rate of inflation for June 2012, according to the Office of National Statistics, was 2.4% (Consumer Price Index) or 2.8% (Retail Price Index). Are these rates so unrealistic?
For investments, where I advise – my opinion for the future – if I could consistently achieve net returns of 5% per annum plus a bit to neutralise inflation – I would feel job well done.
The concern with pensions are twofold – rates available once at retirement but also the returns achieved during the term getting to your retirement date.
So the investment environment and your success is paramount – effective management is essential and this is where my expertise can help. The current speculation about the Eurozone, amongst other international and national issues, and focus on Spain will have an effect. If you think, circa £29 Billion was wiped off the value of the FTSE 100 yesterday – while Spanish government borrowing costs soared to a new euro-era high of 7.5%.
As a result, gilt yields have approached all-time lows. This could be disastrous for many pension pots as the vast majority of all pensions and savings are linked, at least in part, to shares. The crisis in Europe is and has driven many investors into gilts (seen as a “safe haven”. The downside effect is this has pushed up the price of gilts, so reducing their effective yield and forcing annuity providers to cut rates to historic lows.
This means those on the cusp of retirement are destined to have a permanently lower level of retirement income. Remember, there are choices as to how to draw your retirement income and some of those facilities are flexible and can change. For example there are temporary annuities, income drawdown, and some halfway products available. With pension planning and retirement income – every situation is unique, so I can only comment on options available on a case by case scenario.
Issues to be aware of – personally I am uncomfortable as a general with the following – buying an annuity when you do not have a need for the income (I have heard of sales people presenting that you might as well take it – income you could have and why not….beware of sales approaches); moving pensions offshore to circumvent UK legislation (tax planning is all about using the rules as they exist any time you try something else, you run the risk of future legislative changes and the wrath of HMRC).
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Tags: Financial Planning, Investment Planning, Pensions, portfolio investors, Retirement Planning, Wealth Management and Tax Planning
