Savers have long been hit by stock market falls and Bank of England’s attempts to breathe life in to the economy have seen pension payouts fall.
Stock markets have fallen, annuity rates dropping and inflation rising has caused pensions havoc for millions of people approaching their retirement.
Worst affected are those in non final-salary company and personal pensions which are still invested in the stock market as they approach retirement. Many savers have company pensions and those close to retiring will face substantial losses as they will have little time to try and make up the losses experienced in their pension.
What has caused these problems?
The Bank of England’s decision to print £75billion of money also known as QE (Quantitative Easing) QE enables the banks to lend more money to small businesses. However, it also pushes down pension payouts as the value of annuities (which provides an income for life from YOUR pension pots) is based on Government bonds called Gilts.
It appears that The Bank of England uses the money they creates from QE to buy these Gilts. This in turn pushes up their price and reduces the amount of annual income they pay out.
With many pension funds still invested in banks, this affects the value of the money held in these funds. And you are particularly vulnerable if you are approaching retirement and still heavily invested in the stock market. And some pension plans do actually provide some protection by automatically transferring your savings from the stock market a few years before their retirement and put it into safer investments such as cash or something else less dangerous or susceptible to market forces.
To ensure this, you will need to ask your pension company or IFA if your investments are being or can be moved into safer options. As if you don’t want to lose your money, the only real option is to transfer your pension pot into cash. But these type of accounts pay low interest rates. But moving out of shares, you will also be taking your losses as they are and will not benefit from any recovery in the Stock Market share prices.
Other things to be aware of are:
With-profits pensions may have hefty exit penalties, aka market value reduction.
There are a few things you can do to ensure the largest return and pension income from your pension pot. Shop around for the best annuity that suits you not your Pensions company.
Check with your pension company if the annuity it offers has any guarantees. Some pension plans offer guaranteed rates. If you have the internet, you can research this area by using the pension calculator on: www.fsa.gov.uk
If you drink alcohol, smoke, are overweight and have any medical conditions such as Diabetes, no matter how slight or minor you might be able to qualify for an enhanced or impaired life annuity. These pensions pay more because of your anticipated shorter life expectancy.
2 in 3 of savers who are buying a pension fail to provide for their spouse should they die. These people, who are usually and mainly male, buy a ‘single life’ annuity which effectively dies with the, so leaves their widow to survive on their state pension. It is however possible to get an annuity that pays an income to their surviving spouse.
Another cheaper option is to buy a guarantee that ensures the pension will continue to pay out for a minimum period, should you die. However, this is sometimes inadequate as women usually outlive their husbands.