Baby Boomers have been seen as the lucky generation: no world wars, longer life expectancy, huge technological advances, free university education and great material wealth compared to their parents and grandparents. But those relying on private pensions to fund their retirement are not feeling so lucky now, as they face having to work longer or live on much lower incomes than expected.
During 2012, record numbers of people will reach age 65 and many will need to buy an annuity. Since 2008, rates have fallen by about one quarter because of falling gilt yields. They fell by more than 8% last year alone. If the decision is to go into income drawdown instead, they can’t escape the problem, because the amount of income they are allowed to draw also depends on gilt yields.
Even those already in drawdown arrangements that were set up when rates were much higher are seeing steep reductions in income as they reach the mandatory review dates.
There are big challenges for retirees and their advisers in today’s volatile and unpredictable markets. What will be the best strategy to secure the value of their pension funds, and generate a sustainable income?
Product providers are keen to get their share of the action, and new retirement income solutions have been launched with more in development. Some offer fixed term annuities, for example over five or ten years, giving a guaranteed income for that period while keeping longer term options open. Others give a combination of investment exposure with guarantees of either income or capital values or both. These products can be complex and expensive, and independent advice is essential.
Please note that the above is given for information purposes and does not constitute as financial advice. Anyone planning to retire in the next five years and anyone already in drawdown arrangements should take a careful look at all their options. This means talking to an independent financial adviser who has access to the whole retirement income market.
Author: Sally Lockey, Financial Planner, Tait Walker Wealth Management
Tait Walker Wealth Management are authorised and regulated by the Financial Services Authority.