Commenting on recent political and economic events, Ian Price, Divisional Director at St. James’s Place, says that these highlight the need to make the most of the choices available to generate income in retirement.
“Uncertainty in the UK economy following Brexit has accelerated the decline in the incomes paid to those who convert their pension pot into an annuity. Providers have reduced their standard annuities by around 11 per cent since the EU vote, with larger decreases for some other types of annuity,” he writes.
“Annuity pay-outs reflect returns on government bonds, or gilts. When gilt yields fall, annuity rates also fall. Uncertainty about the economy has prompted investors to retreat to the perceived safe haven of gilts, forcing down their yields.
“The Bank of England’s announcement of a 0.25 per cent cut in interest rates and GBP60 billion in gilt purchases only served to make the situation worse. The yield on a UK 15-year gilt fell to 1.14 per cent on 4 August and had dropped to 0.92 per cent late last week.
“It’s not clear if or when the decline in gilt yields will be reversed, but those who delay buying an annuity in the hope that returns will improve may end up disappointed. Until economic policy starts to normalise and interest rates start to rise again, gilt yields will probably remain low, and therefore so will annuity rates.
“Nevertheless, the low gilt yield environment, exacerbated by the break with Europe, will influence the decisions people make when securing a pension income. Yet, the introduction of pension freedoms in April 2015 has opened up greater opportunities for people to defer the purchase of an annuity, and instead, they can make their own investment decisions, while withdrawing any amount of income they like through drawdown.
“The potential for more bumps along the way also highlights that those in drawdown may need to consider scaling back future withdrawals, as taking money during stock market downturns will make it much harder to rebuild a portfolio to a position of strength.
“But putting withdrawals on hold for any length of time can prove tricky if there are no other sources of income. That’s why a two-tier approach is worth considering: put part of your pot in an annuity, then invest the rest.
Price concludes: “An annuity will give you a guaranteed level of income for the rest of your life, regardless of stock market fluctuations. The pension that’s invested can provide extra income when you need it”.