New figures have shown that falling gilt yields mean retirees are around 60% worse off than if they had retired 20 years ago.
Gilts & Annuities
Insurers use gilts to back Annuity products, the lower gilt rates we have seen over the past few years and particularly over the past few months will lead to lower incomes in retirement for many.
Falling Annuity rates
July: £6,212
August: £5,852
September: £5,802
October: £5,675
November £5,577
Based on a male with a £100,000 pension fund, no guarantee, level, 50% spouse’s pension
The yield on 10 year gilts has dropped to 2.07%; the lowest level since the 1950’s when Government bonds were introduced. At the start of the year the yield was 3%, the fall over the past few months has been reflected in lower Annuity rates, using a pension annuity calculator will show you just how far rates have fallen.
The fall in gilt yields can in part be explained by the Eurozone crisis. Investors are increasingly nervous about the state of the Eurozone economies and are looking to invest in what they perceive to be less risky assets, for example UK government debt. As the demand for UK government debt, or gilts, rises so does the price, which in turn pushes down the yield, thereby reducing Annuity rates.
Twin threats of low Annuity rates and volatile stockmarkets
Annuities are the most popular way of turning a pension pot into an income; they are particularly suitable for those people who are looking for a guaranteed income for life.
Annuities are used not only by people who have saved into Personal Pension Plans and Stakeholder Pensions but also members of money purchase, or defined contribution, Occupational Pension Schemes.
For those people looking to retire soon falling Annuity rates is not the only problem. Those people close to retirement have often been affected by increased volatility on the world’s stock markets over recent years and in many cases disappointing investment returns.
The past few years has also seen many Final Salary pension schemes close, only to be replaced by Money Purchase pension arrangements. The fall in Annuity rates is likely to mean a double whammy for pension savers; the loss of Final Salary guarantees and lower Annuity rates.
Further falls predicted
Annuity rates are expected to fall further in 2012 as a result of EU legislation concerning the money Annuity providers will need to leave in their reserves.
A European Court of Justice ruling earlier this year banning gender discrimination in insurance contracts could also have negative pressure on Annuity rates, and of course gilt yields could fall further.
Alternatives
Financial experts believe that for those retirees seeking a guaranteed income have precious few alternatives other than an Annuity.
However, other alternatives, such as Income Drawdown or Investment Linked Annuities, do exist if a retiree is prepared to accept some risk to their capital or a variable level of income.
Fixed Term Annuities can also be an option for those retirees who need an income but still want to benefit from guarantees.
Annuity advice
If you are approaching retirement and would like advice on the options available to you our team of Independent Financial Advisers are here to help, call them today on 0115 933 8433 to discuss your circumstances.
