As the political fallout from Brexit continues with almost daily resignations, the effects on your personal finances are starting to filter through.
One of the key groups who will feel an almost immediate effect are those people approaching retirement.
Decision time
As you get nearer to retirement a number of decisions need to be made, perhaps the most pressing is how to turn your pension pot into an income. Despite the introduction of Pension Freedom in April 2015, using an Annuity, which provides a guaranteed income for the rest of your life, is still a popular option.
However, following Brexit, those people choosing to buy an Annuity rather than using other options, such as Flexi-Access Drawdown, or FAD for short, may get less income than they would have done in previous months.
Falling Annuity rates
Annuity providers use a combination of financial instruments, including Gilts and Bonds, to underpin the Annuities they sell. In shorts, Gilts are a loan to the UK Government, which pay a rate of return, known as a yield. Because the loan is to the Government, Gilts are generally deemed to be an extremely safe investment, which is partly why they are used by Annuity providers. However, when Gilt yields fall, naturally Annuity rates need to be reduced, which is what we are seeing at the moment.
Since Brexit, and following falls in UK Gilt yields, many insurers have cut their Annuity rates; others are expected to follow this lead in the days and weeks to come.
It is worth noting of course, that existing Annuities, which are already in payment, are not affected by these cuts; once bought, the income from an Annuity can never be changed.
What are your options?
If you are approaching retirement and were planning to buy an Annuity, what are your options following the recent cut in Annuity rates?
Proceed as planned: You could of course, having considered the alternatives, decide to continue with your original plan and buy the Annuity. If you do decide to do this, remember these golden rules:
- Shop around, preferably using an Independent Financial Adviser (IFA), to make sure you get the best Annuity rate possible. Each year around 60% of people who buy an Annuity do so from their existing pension provider and as a result get a lower rate than they would have done if they had shopped around
- Check whether any health or lifestyles issues mean that you qualify for an Enhanced Annuity, which will increase the income you get
- Take Independent Financial Advice, to confirm that an Annuity is the best option for you and if so, which provider you should use
Delay: If the best Annuity rate you can find has fallen to a level you feel is unacceptable, you could decide to delay your purchase in the hope that rates will rise in the future. Whilst this is of course possible, especially if inflation rises, which would theoretically push up the yield from Gilts and Bonds, it isn’t an option without risks:
- Whilst you wait to buy your Annuity your pension fund will remain invested. If you hold it in Cash, charges and inflation could erode the real value, if it is invested in Equities (stocks and shares) you are leaving yourself open to expected stock market volatility
- Every month which goes by without buying an Annuity is month of income which has been effectively lost and needs to be made up by a higher rate in the future. This can take many years and there is no guarantee that by waiting you will actually receive more income over your lifetime
If you decide to delay, you also need to consider how you will replace the income you would have received if you had continued with your Annuity purchase. If you have other savings and investments, using these is a possibility, but this will of course reduce your capital base,
Use an alternative option: An Annuity is only one way of turning your pension pot into an income, others, such as Flexi Access Drawdown or a Fixed Term Annuity will provide you an income without tying you into a low Annuity rate.
Each option has different advantages, disadvantages and risks, which need to be considered before a decision to proceed is made.
Postpone your retirement: If your retirement date is flexible, and you are happy and able to continue working, you could delay your retirement until a future date when Annuity rates have improved.
Of course, this option also carries risks, many of which are the same as if you delay your purchase.
Here to help
If you are close to retirement and concerned about the recent falls in Annuity rates, or just confused about the best option for you, get in touch, we are here to help.
Cal Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk
