Approaching retirement? Chances are you’re playing the waiting game. In just two months you will be granted the freedom to do just what you wish with your retirement savings, as compulsory annuity purchase is scrapped for UK pensioners.
Currently you have to prove you can provide yourself with a fairly sizable income in retirement to avoid having to lock into a fixed retirement income. In the past, before the global recession and plummeting gilt yields, buying an annuity and locking into a guaranteed retirement income – around 8% a year of your pension pot – was a very attractive offering. Annuity rates are linked to gilt yields, and in June 2008 a 15 year gilt paid 5%. Fast forward to December 2014 and a 15 year gilt paid just 1.68%. Those retiring over the past decade have faced a double hit – as well as falling gilt yields, the stock market tumbled losing their retirement capital.
Now, thankfully, the stock market has picked up; the FTSE 100 topped its all-time high record last week, the S&P 500 has been on a steady incline for five years, and European stock markets have been buoyed by the promise of ECB quantitative easing.
While gilt yields – along with Bank of England base rate and inflation – remain low, this matters less to retirees as they are free to manage their own pension pot from April. Figures from the Association of British Insurers show that the number of annuities sold fell by 28% in the three months to the end of 2014 compared to the previous quarter, and by 64% compared to the last three months of 2013.
Instead, more people are choosing to delay their retirement decisions until the changes have come into place, and those that can already access their cash are doing so.
There were still 28,712 annuities sold in the fourth quarter of 2014 however, a figure that concerns Alan Higham, Retirement Director of Fidelity Worldwide.
“As pension freedom day draws closer it is no surprise that fewer people chose to buy annuities, preferring to defer any decision until after April,” he said.
“However there is a significant number of annuities sold which could have been taken as a lump sum under the small pot or trivial pot rules. This makes me question whether consumers were aware that they did not have to buy an annuity.”
Higham’s concerns align with the findings of investment management firm Towry. Their advisers asked clients how the upcoming pension changes would affect them – and an alarming number either did not understand the changes, or had not yet considered their implications.
Half of investors surveyed said that they were not yet sure whether the changes would be positive, and rather than access to their own cash, the majority of respondents the most interesting change regarded new tax rules for beneficiaries of their pension pots after their own death.
One in five stated that giving savers access to their own pension pot was a “negative development”.
Tom McPhail, Head of Pensions Research for Hargreaves Lansdown concluded: “These reforms are overwhelmingly popular and in the long term will do much to reinvigorate pension provision in the UK.”
Young Savers on the Right Track
There has been some good news in the retirement sphere recently; pension saving among young people has reached a 17 year high. This boost is down to the continued march of auto-enrolment, meaning that young workers have to actively opt out of their workplace scheme. The benefit of a long-term savings vehicle when initialised at a young age is inimitable – compound interest over time will help secure a sizable pension pot for these investors.
However Simon Chinnery, Head of UK DC at J.P. Morgan Asset Management warns that when minimum contribution into workplace savings schemes rise to 8%, you may see younger workers who are typically on lower salaries opt out as they feel the pinch.
“The risk here is to assume these young savers will remain engaged when contributions reach 8%, while they’re faced with immediate long-term debt to pay off and their retirement is decades away,” he said.
“While these figures show we’re moving in the right direction, more intervention is clearly needed. The challenge for the government, adviser community and financial industry is how to maintain this momentum?”
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