Low savings and investments hit retirement incomes
Two thirds of retirees who rely on savings and investments to fund their retirement have seen their income fall in the last two years. On average, retirees have seen a drop in income of £2,400 a year, according to Investec Wealth & Investment.
It said below-inflation returns from traditionally safe investments such as cash and bonds are mainly responsible for the fall.
The research also shows that nearly six in ten retired people rely on income from savings and investments to supplement their pensions, while over the last two years the majority (58%) of these have tried to boost returns by changing products.
Unfortunately, of those who switched products, half continued to see their income fall or flat-line.
Rowena Houston, senior investment director at Investec Wealth & Investment, said: "The last few years of stockmarket volatility and low interest rates have been particularly unkind to the majority of retired people whose portfolios have been heavily skewed towards safe havens such as cash and government bonds, where returns have failed to keep pace with inflation."
The top three most popular income generating products among the retired are cash ISAs (73%), cash savings accounts (51%), and Premium Bonds (33%) – but all three are generating low returns.
The average rate on an easy access savings account with no bonus was only 0.76%, over 1.5% lower than the current rate of inflation at 2.4%.
Investec said that, as a result of poor performance hitting retirement incomes, a third of retirees have cut back on food, restaurants, theatre and cinema. A third 33% have stopped taking holidays, 20% are gifting less money to family members, and 14% are spending less on maintaining their home.
Houston said retirees who remain risk-averse but wish to generate more returns from their investments could consider infrastructure funds and property investment trusts. "These asset classes are relatively low risk yet are paying a decent yield of at least 5%," she said.
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%.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.