For many of us the Bank Holiday weekend was a chance to relax, take things easy and consider how best to amuse ourselves in this great British weather of ours. But for voters in Greece and France it was an opportunity to elect a change of government, one which for people in the UK planning on retiring soon, could have significant implications.
So how do the decisions of Greek and French voters, to elect anti austerity parties, affect your pension if your are planning to retire soon we hear you ask.
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Firstly the world’s stock markets reacted with fright, nervous that the Greeks are now more likely to leave the Euro and the French are looking to renegotiate the Fiscal Pact, which was almost impossible to agree in the first place.
In the UK the FTSE 100 fell by 1.8% on Tuesday, with the main markets in Germany and France falling by 1.9% and 3% respectively. With shares falling in value many investors switched assets to government bonds, with UK gilts being particularly attractive to investors, bad news for Annuity rates, more of which in a moment.
For now though back to shares.
In our experience people nearing retirement generally still have a significant amount of their pension savings invested in stocks and shares in the months and even days before they plan to retire, leaving them open to stock market volatility.
Put simply, stock market falls lead to smaller pension funds which equal less money to buy an Annuity, or enter Income Drawdown with.
Lower Annuity rates
Falling Annuity rates have not been far from the headlines for some time now.
Pushed down by falling gilt yields, as a result of Quantitative Easing, increased life expectancy, the European Court of Justice ruling banning gender discrimination when pricing Annuities, and Solvency II, also introduced by the EU, our own pension Annuity Calculator shows that Annuity rates have dropped by around 13% over the past year.
When UK gilts become more popular the price rises, as is usually the case for anything in demand, pushing down the yield. This then pushes down Annuity rates, which a closely linked to gilt yields.
So what happens when investors get nervous about the European economy and the Euro specifically? That’s right, they buy UK government gilts, the price rises, yields fall further pushing down Annuity rates.
The yields on UK gilts fell close to an all time low yesterday, whilst this is good news for George Osborne, it might not such good news for would be retires looking to buy an Annuity soon.
What can you do?
If you are planning to buy an Annuity and retire soon, the weekend’s events could represent a double blow; you may well have a smaller pension fund as a result of stock market falls and Annuity rates could drop further still as a result of lower gilt yields.
So what to do?
Looking on the bright side stock markets could bounce back quickly, they often do, although not always, and the sudden dip in gilt yields might be temporary and not immediately passed on in the form of lower Annuity rates.
However if this does it happen, and stock markets continue to be volatile with Annuity rates falling, a few quick options for you:
- Carry on as planned, buy your Annuity, and accept that it will give you a lower income for the rest of your life
- Although probably not a popular option, you could delay your retirement in the hope that stock markets will recover and Annuity rates rise
- If you need, or indeed want, to retire now, consider using other savings or investments to provide an income until your pension fund has recovered recent losses. Remember though that other investments, if they are exposed to the stock market, are likely to have suffered in a similar way to your pension
- Consider an alternative solution such as Income Drawdown, which will allow your funds to remain invested in the stock market, meaning you won’t crystallise any losses just yet, whilst being able to take an income
- A Fixed Term Annuity offers an additional option, especially if you have not been invested in the stock market, perhaps having moved to Cash or Deposit based investments, and simply want to avoid locking into low Annuity rates
Next steps
If you are planning to retire soon, the events of the weekend are a sharp reminder that factors well outside of your control can, and do, affect your retirement income.
If you are invested in stocks and shares the damage in the short term is probably done and you will need to ride out this current volatility, although that in itself can be a dangerous strategy, markets are just as likely to continue to fall as they are to recover.
All of this shows one thing, advice is crucial, whilst our team of Independent Financial Advisers can’t do anything about election results, falling stock markets and lower Annuity rates, we can help you make the best of your situation, laying out the options available to you and recommending the best course of action for your circumstances.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
