Millions to face new pensions misery as payouts are slashed #UKPensionNews #IN
10 Thursday Oct 2013
PENSION payments are set to be reduced by hundreds of pounds a year, wrecking the retirement dreams of millions of people.
Annuity rates, the guaranteed income bought with a pension pot, are under “downward pressure” and set to fall four per cent by December, say experts.
For 400,000 workers planning to retire by the end of the year, they must either hope rates rise again or accept a much lower payout than they had expected.
The four per cent drop means payments from a £100,000 pot would drop from around £6,000 a year today to nearer £5,760 in the next few months, according to Capital Economics.
The warning is bad news for those who have already delayed taking their pension in the hope that rates rise in the coming months.
Annuity rates have fallen from 15 per cent in the early 1990s, damaging the retirement plans of many workers approaching the end of their working life.
Annuity rates are bad enough already but if they fall further then it will be another major blow for the nation’s pensioners. Quantitative easing [pumping money into the economy] has played a key role in the downward spiral of annuity rates, so the fact that the new Bank of England Governor, Mark Carney, has said more of it could be on the table if the economy flatlines could spell more bad news for people in retirement. For pensioners, whether to take an annuity now or hold back until rates improve is a phenomenally difficult decision to make. They may get worse.
“Today’s pensioners are facing market conditions that are about as tough as they could get.”
Further cuts could be on the cards. Annuities are backed by UK government bonds, called gilts. The payout offered to customers is largely determined by the prevailing rate of return (or yield) on these assets.
According to Capital Economics, these returns will face “downward pressure” until January 2014. This is due to falling levels of inflation in Britain, it said.
The group predicts a 0.5 per cent drop in the return on 10-year government bonds. Such a reduction is likely to translate into a four per cent fall in annuity rates, past trends suggest.
If rates fall heavily between now and December, they could take months or even years to recover. And savers who delay buying an annuity for two years only to find rates are no better than today will have to live 41 years to recoup the money.
Even if rates improve by six per cent, it will take 19 years to get back the cash they sacrificed by waiting.
A retirement income specialists said: “It would take a betting man to take a punt on rates improving at least six per cent over the next couple of years to make any delay worthwhile.”
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