The Bank of England’s decision to cut interest rates has already caused huge ramifications for consumers approaching retirement.
Although widely expected as a consequence of Brexit, the reduction from 0.50 per cent to 0.25 per cent was the first interest rate adjustment since March 2009. The UK’s central bank was also compelled to extend its quantitative easing programme through the purchase of gilts with maturities of at least 15 years.
Andrew Pennie, marketing director at Intelligent Pensions, explained that annuity rates have immediately suffered, with many falling 8 per cent since the base rate reduction was announced – this was in addition to a 12 per cent drop since the start of the year. He said, “It has been a blow to savers and people looking to guarantee income in retirement.”
Mr Pennie highlighted the increased importance for consumers “to maximise the value of their annuity” – especially whose income could be eligible for enhancements. He said, “It is so important to shop around and take into account any lifestyle or ill health factors that may increase your potential income – because that is guaranteed income for life.”
Despite expectations for annuities to almost become extinct as a result of the pension freedoms, the Association of British Insurers (ABI) reported in March that popularity for guaranteed income in retirement was rising. In the first quarter of 2016, annuity sales stripped drawdown for the first time since the freedoms, as a fixed retirement income looked set to be rejuvenated.
Despite this data, Claire Trott, head of pensions technical at Talbot and Muir, believes annuities were falling further behind drawdown as flexible income became more highly sought after. However, even drawdown investors will need to plan carefully as a result of the rate slash.
“Those using the flexibilities will need to carefully consider where they hold any cash while drawing income from their pension. Advice on how to invest when in drawdown is very important to try and make the funds last as long as possible,” Ms Trott said.
Final salary schemes are also in dire straits as much of the underlying investments rely on gilt yields, which have been affected by the Bank’s decision to reduce rates.
Following the recent plight of BHS and Tata Steel, Royal Mail has written to employees to announce final salary funding expectations have more than doubled from £400m to £900m, meaning the scheme will be “unaffordable” by March 2018.
“The last thing we want are more pension schemes destabilising businesses,” Mr Pennie said, adding the issue of failing retirement schemes has wide-reaching economic connotations and this situation is only likely to worsen.
“Trying to achieve an income in retirement is becoming more and more difficult,” he said.
craig.rickman@ft.com
