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Pensions in the credit crunch
As we are all painfully aware, the credit crunch has led us into a global recession. Among the general gloom, the pensions market has been particularly hit by the effects of low interest rates and collapsing stock markets.
SIPPs cannot offer loan-backs but what they can do is invest in commercial property and allow connected transactions. This means that an individual who owns a commercial property could sell it into their SIPP, thereby raising cash for other purposes.
The range of investments allowable under a SIPP could also open up potentially lucrative, albeit riskier, options in the search for a positive investment return.
Retirement
The downturn in world stock markets has likely disrupted many people’s plans for retirement. The effects have taken many forms.
For those in defined contribution or personal pension schemes the fall in markets translates directly into a fall in fund values and a consequently lower income. At the same time falling interest rates mean savers are not achieving very good returns on savings which they would use to supplement their pension income. On top of this, the whole exercise of quantitative easing has seen gilt rates fall and annuity rates suffer a similar downward trend.
Assuming that people try to formulate some idea of target income in retirement, there may be a number of ways forward:
- defer taking benefits and hope markets improve;
- settle for a lower income;
- pay more contributions.
Of course, some employer schemes might have operated a lifestyle fund to phase out equity exposure towards retirement. In those circumstances some individuals may well have retained much of their fund values.
At retirement the option of unsecured pension (previously income drawdown) becomes available and since A-Day in 2006 this has made it possible to withdraw a tax free lump sum from age 50 (55 from next April) without also drawing a regular income.
This flexibility means that in difficult economic times pension funds have been increasingly used to provide cash for short term needs rather than genuine retirement benefits.
- Mike Morrison is head of pensions development for AXA Winterthur Wealth Management
*** Click here to find out more about retirement options with AXA Winterthur Wealth Management.
