Pension incomes plummet due to falling stockmarkets
People approaching retirement are facing a double hit to their pension income due to the turmoil in global stockmarkets.
A report from PricewaterhouseCoopers (PwC) has revealed that people with private pensions will be as much as 30% worse off than people with similar savings who retired in 2008.
The problem is that falling stockmarkets have eroded the value of equities in people's pension pots. At the same time, cautious investors are buying government bonds, known as gilts, which is driving up the price of gilts and pushing down the rate of interest - known as the yield - paid to gilt holders.
Falling gilt yields is a big problem for pensioners as most pension providers invest in gilts and use the yields to pay pensions. As a result, the income from annuities - the income for life policies most people buy with their pension pots - is based on gilt yields.
Falling gilt yields have cut pension incomes significantly. In 2008, every £100,000 you had in your pension pot would buy the average person an annual income of £7,500, according to PwC. Three months ago, that income had dropped to £6,500 and now you would get just £6,160.
"Many people retiring now will be caught between a rock and a hard place," says Peter McDonald, a partner at PwC. "If they defer buying an annuity until prices improve, they're stuck with no income in the meantime, which might not be an option."
In order to get the largest retirement income possible it is important you shop around before purchasing an annuity. Rates can vary widely between providers. You could boost your income by up to 20% if you take the time to find the best deal, says William Burrows, spokesperson for The Better Retirement Group.
Anyone who is still a few years from retirement should learn from the troubles facing today's pensioners. Make sure you start to move your pension investments out of equities and into less risky investments, such as cash, in the years before you are due to retire. This way you reduce the chance of your final pension pot being hit by a slump in the stockmarket.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.