A national newspaper got very excited a few days ago over the prospects of a sharp rise in annuity rates – the same newspaper, incidentally, that periodically scares its readers with stories about the death of pensions.
The Daily Express claimed that incomes from annuities are set to rise by ten per cent in the short term and by 25 per cent further out.
If accurate, these projections are good news, making retirement planning far easier. That’s because a ten per cent rise would increase the income from a £100,000 pension pot from £5,600 to £6,100 a year (still way below what would have been achieved before the recession), while a 25 per cent boost would see income from the same pot rise to about £7,000 a year.
But anyone currently thinking to convert their pension investments into income would be wise not to do anything without first talking to a financial expert like The Whitehall Partnership.
There a number of reasons for caution. Not the least of these is that any objective reading of the economic runes would tell us that yields on UK government debt (gilts), the benchmark used by insurance companies to determine annuity rates, may not recover to any substantial degree for some years yet.
Although some key indicators, such as GDP growth, have shown that the country has avoided an unprecedented triple dip recession, our economy is still sickly and has a long way to go before it comes off the critical list.
There is simply too much uncertainty centring on issues such as the long-term impact on gilts of the Bank of England’s multi-billion pound quantitative easy programme – essentially an exercise in printing money – that so far seems to have done little to achieve its aim of re-stimulating a weak economy. And who knows what the incoming Governor of the Bank of England, the Canadian financier, Mark Carney, is going to do? Not even George Osborne, one suspects.
Then there is data that shows that things in the financial garden are still far from rosy. For example, it has just emerged that wages have fallen more in real terms in the current downturn than ever before.
Output has dropped dramatically since 2008 and those who have managed to keep their jobs are doing so because they are prepared to accept not just prolonged pay freezes, but actual cuts in their wages.
This can only reduce the amount of money circulating around the wider economy and also, ultimately into pensions investment, so diluting the aggregate wealth out of which annuities are paid.
The real picture, therefore, is nowhere as clear cut as the Daily Express would have us believe.
Yes, annuity rates are indeed rising: one report shows they have gone up by three per cent since the start of the year. But that rise goes nowhere near enough in offsetting the falls we have seen since 2008.
In fact, a typical retiree stands to get £10,000 less over the duration of his or her retirement than would have been the case only two years ago. People who have been forced to buy annuities over the past couple of years have got truly dreadful deals.
If you are retirement planning, or are looking for quality advice on any aspect of your investments, call financial expert The Whitehall Partnership today on 0845 43 49 250 and arrange a no-cost initial meeting.