According to a leading pension provider, Skandia, income drawdown advice is needed for retirees as gilt yields drop. It is becoming more important that people approaching retirement should receive  professional advice on how to drawdown their pension as they are more than likely to take a double hit from lower gilt yields and falling pension fund values.

They suggest that a well planned pension fund income withdrawal arrangement could increase the income a retiree can take by more than 6% in the future. Therefore suggesting that an annuity secured on the best annuity rates may not be the best pension option.

You should therefore look at alternatives to simple annuity quotes.

Gilt yields, which are used in calculating income withdrawal contracts, now stand at just 3.75%, Skandia says, the lowest they have been since income drawdown was introduced in 1995.

Many pension funds have also been hit badly by falling investment markets, leaving many people much worse off in retirement.

Skandia suggests that independent financial advisers (IFA’s) can help their clients increase their overall retirement income by keeping some pension money out of income drawdown.

There are a number of pension schemes which offer ‘additional designation’, according to Skandia, which means that any pension money transferred in withdrawal after gilt yields increase will automatically trigger a recalculation of the income levels for the entire pension fund amount.

They state that a 55-year old female with a pension fund of £100,000 would see her income increase by around 7.7% if gilt yields increase by 0.5%, while a 60-year old male would see an increase in his income of 6.7%.

Careful planning, utilising specialists such as Origen, could ensure that clients entering income drawdown now can also benefit from higher income allowances in the years ahead if interest rates and gilt yields increase to their previous levels. Worth checking out?

You can plan to enjoy a flexible income in retirement if you consider what is available from Lincoln i2Live. Their innovative i2Live Annuity can offer you financial flexibility and control to help you enjoy your retirement years to the full. I suppose you could say it’s one of the new breed of variable annuities.

It allows you to vary your income as and when you need it, and you can still kick off your retirement years with that long held ambition you might have to travel or perhaps own a boat, then take less or more income as required in later years. A really flexible arrangement.

With i2Live Annuity, you can take between 50-120% of the income that could otherwise be provided from a conventional level annuity, and stay invested in equities up to and beyond reaching age 75. You can also enjoy the reassurance of an Income Guarantee Option that can be switched on and off as necessary to ensure your income doesn’t fall below a guaranteed minimum level. Even the best annuity rates can’t equal this, but thought might be needed if you qualify for an enhanced annuity through ill health.

With the cost of living rising, especially for older people, and hopefully a long retirement to fund, why should you be stuck with the restrictions of a conventional annuity when you can have much greater flexibility instead.

This contract, with the guarantees, could be a better option for you than an income drawdown arrangement.

Call Origen now to see how this plan might suit you.

A major pension and annuity provider, Legal & General, has sought to draw a line under increasing speculation that it would be forced to raise funds from its shareholders after it said a £1.6bn cushion would protect it well against a prolonged economic downturn and future slumps in the stockmarket.

Shares in Legal and General stabilised following the statement, though some of its rivals, Prudential and Aviva (Norwich Union), also strong in the pension annuity arena, suffered further falls in their share prices.

On the day of the statement, Aviva lost more than 3% of its value, and Prudential 5%, after a similar drop the previous day. Legal and General, which stood at 159p in early 2007, finished that day up 2.2% at 45.3p.

Some investors have said that they were concerned that insurance companies would be forced to cut back their dividend payments or ask for further capital from shareholders despite insisting their finances remained robust, and that they had sufficient reserves to map their way through deteriorating worldwide economic conditions.

Regulators have confirmed they are in touch on an ongoing basis with all the UK’s 130 life insurance companies and have insisted they test their solvency stringently against further steep falls in the stockmarket. It is understood the Financial Services Authority (FSA) has demanded they test their solvency should the stockmarket reduce from its current level just above 4,000 to 2,000.

L&G said that its reserves had dropped from £2.9bn to £1.6bn following a £650m write down on its £17bn book of pension annuity business and a £650m capital injection. The company has stressed to investors that its reserves policy is cautious and would allow it to survive a 1930s-style recession, should we be unfortunate enough to get one.

They said that last year’s default experience was broadly in line with their long term assumptions, but they feel that they should now reserve on a more prudent basis. As part of their year-end process, they have therefore decided it is appropriate that they take additional reserves against the possible risk of a short term rise in credit defaults.

The rules are that insurance companies must set aside spare capital to cover guarantees that are attached to retirement annuities and with-profits contracts. The capital is mainly invested in corporate bonds, which are considered to be a safe haven except when a sharp economic downturn happens to force companies into insolvency.

Most corporate bonds held by insurers are AAA-rated and invested in what is considered large, stable businesses, but around £105bn of the £237bn sterling corporate bond market is issued by banks, which aren’t exactly stable these days.

It is all rather difficult to understand. We can only hope that the major companies and the regulators know what they are doing and that you can continue to get competitive annuity quotes to find the best annuity rates for your retirement income.

Having to convert your pension fund, your pension assets, into a pension annuity at the time of your retirement or shortly afterwards could prove to be “very costly” for a retiree and is “out of date”.

This is the view that has come out of a new report by the European Fund and Asset Management Association (in short, EFAMA), called ’Rethinking retirement income strategies: How can we secure better outcomes for future retirees’. A rather succinct title (!), but pretty clear that it looks at all pension options.

The report suggested that the best investment strategy for those in retirement was to hold a significant proportion of the pension fund in equities early on and then to switch progressively to bond holdings and pension annuities over time. Nothing new there.

If you keep a balanced asset allocation of your pension fund for an extended period after you retire, you can expect to achieve a substantially higher income when you retire, and at a comparatively low risk, the report claimed.

Their director general, Peter De Proft, stated that in an environment where retirees could expect to live 20 to 30 years in retirement, forcing them to buy a pension annuity at the age of 65 was an out of date ruling. He suggested that retirees should be allowed to select more profitable retirement  products, and hoped that the various policy makers would take their findings seriously and agree to support on equal terms both pension annuities and innovative products such as the likes of sipps and variable annuities that use effective portfolio management strategies.

Income drawdown  experts Intelligent Pensions have agreed that the best retirement strategy is to hold a significant part of a pension fund in equities early in retirement, switching to bonds and also to annuities over a period of time.

If you consider that buying a pension annuity is out of date and not for you talk to Origen about the available alternatives.

There is one option which combines phased drawdown with selective pension annuity purchase, but I think a specialist can best describe that.

Prudential, one of the UK’s largest insurers, and a major player in the pension annuity market, including with profits annuities, is to lower the accumulating value of its various with-profits policies by between 6-10% due to “exceptional market conditions”.

Prudential announced the reduction on the 24 February after revealing that the underlying fund had fallen by 19.7% in value, before tax. Although it did compare this to an almost 30% fall in the FTSE All-Share index during last year.

The insurer stated that it had added around £2.8bn to its with-profits policy values to help smooth the fund. It wil pay annual bonuses worth around £1.3bn with rates set at 3% for most with-profits bonds and personal pension plans and 2% for Prudential sold pension annuity customers. It will also pay out around £1.5bn in final bonuses.

David Belsham, the chief actuary, stated that although investment markets had performed very poorly last year, their policyholders have been protected somewhat from the full impact of the market falls and policyholders will typically see a reduction of between 6-10% in their accumulating with-profits policy values.

Example. A pension policyholder with a 20-year term paying £200 per month will see their policy claim value fall 9.3%, from £103,581 last year to £96,238 this year.

And someone with a 25-year Prudential endowment plan paying £50 a month will have seen their policy value decrease by 6.1%  £37,738 this year, down from £39,569 last year.

It is worth reminding ourselves that with-profits products are meant as medium to long-term investments and Prudential’s with-profits customers have received strong annualised returns over time.

But what if you are in the market for a with profits annuity? Are they a good risk at the moment? Are they likely to give an improving income over time? Not at these rates they won’t.

So, if you are looking at with profits for your pension annuity get some annuity quotes, find the best annuity rates, but beware of anyone over-egging the potential of bonus rates.