We have a changing world when it comes to pensions and pension annuities. The Bank of England base rate and bond yields are extraordinarily low and these factors don’t help.
Pension annuity rates are still around 6-7%, which is pretty decent and could lead, with sensible planning and enough time, to a reasonable retirement income. The base rate can only drop to 0%, so hopefully the best annuity rates shouldn’t drop below, say, 5%, as a result of lower bond yields. Thing is, that difference in the annuity rates could cut your annuity income by as much as 30%.
Now, any low rates shouldn’t last long, if they should come about. It’s only people who choose to buy their annuities at exactly the wrong time who’ll be affected. Possibly people having to because or redundancy, for example.
Would you believe it, the fact that we are living longer comes at a cost. Our increasing life expectancies may also reduce pension annuity rates, because our retirement funds need to provide an income for longer.
What about financial problems with annuity providers?
Should you give your pension fund to an annuity provider in return for an annuity, and the provider goes bust there is a safeguard. You are entitled to compensation of approximately 90% of the value of your annuity through the Financial Services Compensation Scheme (FSCS). Your losses could be significant, but it’s also a reasonable level of protection.
It is unlikely that an annuity provider will collapse, because they make enough money from us by offering such low annuity rates. Annuity providers are insurance companies, and it’s rare for insurance companies to go bust. And, another insurer might decide to purchase a struggling company before the problems arise, and the buyer would pay your pension annuity for you.
Of course, we could see retirees effected by a hike in basic-rate income tax, but a tax change could easily arrive less obviously than that. On the other hand, abolition of tax relief on pensions is unlikely, as it would be political suicide to tell people they must pay taxes twice over on the same income.
Over time, income taxes are likely to be both hiked and reduced. An equivalent 5% increase in the amount of tax a basic-rate payer pays would undoubtedly have a significant adverse impact on a pensioner’s finances. There will probably be a downward pressure on taxes, though, meaning that whilst hikes might be significant, they should actually be manageable.
A lot of changes lie ahead of all of us. If you are retiring soon there probably isn’t time for a great deal of planning. You need to avail yourself of information on all pension options available to you. It’s not just about annuity quotes and the best annuity rates, especially if you have a larger pension fund.
