Might you and your annuity be caught up in the banks bailout
People are starting to say that tomorrow’s pensioners will pay for today’s banks’ bailout.
The government is borrowing heavily to finance the bailout of the banks plus any tax giveaways. This will be done by them issuing a large number of government bonds, known as gilts, and this has a potential knock-on effect for long-term interest rates, which could be bad news for people buying pension annuities.
Insurance companies mainly hold gilts to match their annuity liabilities. Gilt yields have been falling over the past twenty years or so as inflation has dropped and longevity has increased. Annuity rates have been at a 6 year high recently but we have a big fear now of falling prices and falling interest rates, possibly deflation.
Not all annuity providers rely solely on gilts, however, and it is not unusual for insurers to hold a proportion of corporate bonds as well. These have a similar structure to government gilts although they are more risky as there is the potential that companies are more likely to go bankrupt. Some annuity providers hold property assets as well, although that obviously also carries risks. The United Kingdom Government has never defaulted on a government security.
The level of issues of gilts in the current fiscal year is expected to rise to around £110bn, which is almost double the level in the last fiscal year. A retiree with a money purchase pension pot with a high exposure to fixed income securities such as gilts or corporate bonds may do quite well over the next couple of years, as short-term demand will push prices up. On the flipside, the yields will fall, as these are fixed-income securities, and as they do pension annuity rates will follow suit.
Those with the biggest potential problem as they approach retirement are those in money purchase schemes, especially those who are due to retire within the next two years. Some may face a double problem with a downturn in their fund values and falling pension annuity rates. Equity markets will recover, but the big question is when?
You could delay retirement if you can afford to and have savings to live off. Otherwise, you ought to take advice on how best to combine your pension and non-pension assets.
You might fare better by switching to a more flexible pension arrangement, such as a phased drawdown plan, that will allow benefits to be drawn gradually whilst delaying the purchase of an annuity.
As ever, specialist advice is essential.
