As the Bank of England announces £60bn more quantitative easing, experts are concerned about the possible effects on DC savers finds Sara Benwell
Amid the panic about slashed interest rates causing chaos for DB scheme funding it’s easy to forget about the plight of DC retirement savers.
But there is a concern, oft-repeated, about the devastating effect more quantitative easing will likely have on annuity rates.
When the Bank of England announced that the base rate would be cut to 0.25% it knew that this would lead to lower-long term gilt yields. But in the aftershock of the Brexit vote, these measures were deemed necessary to stave off a possible recession.
So acute is the impact of the Bank of England’s measures that both 10- and 20-year gilts hit record lows when the package was announced. And while many pundits were expecting the cut in interest rates, the announcement of £60bn additional quantitative easing came as more of a surprise.
The problem for retirees is that when gilt yields plummet, so too do annuity rates. This means that retirees purchasing a guaranteed income for life in the form of an annuity will get less bang for their savings buck.
Intelligent Pensions head of marketing Andrew Pennie said: “Annuity rates are already at record lows, having fallen 12% since the start of the year – one wonders how much further they can actually fall.”
Steven Cameron, pensions director at Aegon added: “The further cut in interest rates means now is probably the worst time ever to be making a retirement decision, with those buying an annuity today locking in to super-low returns for life.”
‘Wait and see’ won’t win the day
Fortunately, the introduction of ‘freedom and choice’ has given retirees more options and meant that no one will be forced to buy an annuity at the point of retirement.
This means that members who don’t want to lock in low rates can wait until rates are higher.
Cameron explained: “Those not ready to make a ‘once in a lifetime’ decision could consider deferring their retirement date or alternatively keeping their pension fund invested and drawing a retirement income direct from their fund.”
But this ‘wait and see approach’ may not yield results as there is no guarantee that annuity rates won’t fall even further. In fact, Mark Carney, governor of the Bank of England, revealed that MPC members are willing to cut the base rate to 0.1% if their inflation expectations are borne out.
History shows us that individuals have rarely benefited from waiting for annuity rates to improve”
Tom McPhail, head of retirement policy, Hargreaves Lansdown explained: “History shows us that individuals have rarely benefited from waiting for annuity rates to improve and with interest rates looking set to stay lower for longer it may still pay to buy an annuity. Retirees should always shop around to get the best rate on the market.”
For those with larger pots a partial drawdown approach may make more sense than buying a poor value annuity. However, this won’t suit those looking for a secure income in retirement.
And using riskier equity investments in a drawdown environment is not without its own challenges, particularly as longevity concerns coupled with the possibility of future market falls make it more likely that someone will run out of money before they die.
The value of advice
Now, more than ever, it is crucial that people approaching retirement think about taking independent financial advice. Particularly if they are thinking about putting some of their funds in a drawdown product.
Taking advice can add substantial value to a pension pot over the course of retirement and help to make sure that savers don’t burn through their funds to quickly.
As Green puts it: “I would urge people to review their financial strategies sooner rather than later to see what can be done to mitigate the devastating impact the policies could have on their hard-earned nest eggs.”