The hit to annuity rates by the Bank of England (BoE) rate cut should prompt the government to reassess the £1m lifetime allowance (LTA) for pension contributions, a financial adviser with Tilney has said.
Gary Smith pointed out that last week’s 25 basis point rate cut created a “bleak” outlook for an annuities market already under pressure from record-low gilt yields.
With 10-year gilts now yielding a record low 0.55 per cent, pensioners faced particular damage, he said, given the BoE had projected inflation would rise sharply.
“The effect on those about to purchase an annuity is devastating: “I have already experienced a reduction of 5.4 per cent in the annuity rate quoted for a client, and this reduction occurred in a short period between 6 July and 9 August 2016,” Mr Smith added.
People needed to contribute more to their pensions pre-retirement as a result, but as well as being costly, he said this “may not be an option because of the unhelpful reduction in the LTA; a decision that the reconstituted government really should reappraise”.
Bob Wilson, a financial adviser at GreenSky Wealth, said Mr Smith’s call for a reappraisal of the LTA was a good idea, given the reduction in annuity rates, although it was unlikely that the government would rethink its plans.
He added the appetite for annuities among his clients was very low, and he did not expect it to go up much even if rates improved.
KEY NUMBERS
25: basis point cut created a bleak outlook
10-yr: gilts are now yielding record lows
0.55%: is the record low of gilts and retirees will be most affected
james.fernyhough@ft.com
