View the article online at http://citywire.co.uk/money/article/a590692
Euro crisis leaves retirees scrabbling for pension income
The crisis in Greece will have more impact on your pension than you might think. As investors flock to invest in UK debt, annuity rates will fall even further.
Those retiring this year will feel the fallout from the Greek crisis as a rush away from the euro to ‘safe haven’ Britain pushes historically low gilt yields and pension incomes even lower.
You may not think that the amount of income you receive when you retire has much to do with the demise of the Greek economy and the turmoil in the eurozone, but you’d be wrong.
The amount of yearly income you can get when you buy an annuity with your pension pot is affected by gilts as annuities are traditionally invested in them. As the gilt yield falls, so does the income.
The yield on a 10-year UK government bonds hit a historic low of 1.92% in January, which stems from the demise of the Greek economy. Investors are shunning faltering euro countries in favour of economies that are seen as being more stable, such as the UK and US.
The newfound ‘safe haven’ status Britain has acquired has depressed gilt yields further, to 1.87%, and there are fears they could go still lower.
A rock and a hard place
Annuitants have already seen thousands wiped off their potential income over the years owing to increased longevity and low gilt yields. In 1990 a £100,000 pension pot would have bought an income of £17,000 a year, but now it buys just £6,000 – and the figure is set to drop further.
Jason Witcombe, a director of London-based independent financial advice firm Evolve Financial Planning, said those retiring this year were ‘stuck between a rock and a hard place’, but he urged them not to make a rash decision and buy an annuity.
He said a 65-year-old retiring soon should look at whether they need to cash in their pension pot for an income yet – if they can wait, then they should think about doing so, he urged.
Witcombe also suggested staggering the purchase of an annuity, purchasing a smaller annuity with part of your pot and leaving the rest invested with a view to buying another annuity later.
‘If there is scope to delay or stagger an annuity purchase, then you should think about that. [By staggering your purchase] you spread your market timing risk,’ he said.
‘There is no right or wrong, it will be risky whatever you do [as annuity rates can go up and down at any time]. It is only with hindsight that we will know.’
Witcombe also recommended looking at whether you can enhance your annuity rate through an enhanced life annuity, which pays out more income to those with pre-existing illnesses and unhealthy lifestyles.
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