Improving income in retirement

Low gilt yields are having a big impact on the income levels that can be achieved on reaching retirement.

Annuity rates have shrunk over recent years as a result of falling gilt yields, improved life expectancy and fewer people in the annuity ‘pool’ due to the growing popularity of non-annuity retirement income options.

Some new research from Skandia has found that this low annuity rate environment has also had an impact on the financial advice being provided to investors reaching retirement.

Skandia found that over half of financial advisers are either recommending a delay to converting pension funds into an income, until annuity rates improve, or phasing their retirement benefits.

29% of financial advisers are recommending the use of savings or investment portfolios to provide an income until such a time when pension income can be generated.

Of course there is no guarantee that annuity rates will improve.

Looking ahead to the next couple of years, the outlook for annuity rates is fairly mixed. Whilst gilt yields could rise from their current near historic lows, other pressures (including new European regulations) are likely to drive down annuity rates in time.

Buying an annuity with your pension fund, after taking tax-free cash if required, is a lasting decision and can look unwise with the benefit of hindsight, should annuity rates improve shortly after the annuity has been purchased.

The market for retirement income products in the UK remains pretty much polarised between conventional annuities and unsecured pension (USP, previously known as income drawdown).

Some ‘third way’ retirement income products have been created, with aim to blend the security of annuity income with the investment growth potential of USP. Despite this attractive sounding proposition, third-way products have largely failed to date to gain popularity in the UK market, partially due to their often opaque charges and complicated terms.

The best way to ensure a sustainable level of income in retirement is to plan for this as soon as possible, giving you as much time ahead of retirement as you can to build sufficient retirement funds.

If you find yourself reaching retirement without the benefit of planning, you need to make the most of the pension and investment funds you have managed to accumulate during your working lifetime.

This means more than simply shopping around for the most competitive annuity rate. Exercising the open market option to get the best rate is only one consideration when converting pension funds into an income in retirement.

Photo credit: Flickr/AngusKingston