Sliding markets and falling annuity rates present twin challenge for imminent retirees

18 March 2020

Since the outbreak of the Coronavirus, Covid-19, the effect on the global economy has been widespread and somewhat disruptive, with sharp falls on stock markets pointing to a recession. Experts are anticipating this being a temporary slump and are advising investors to either hold tight or move to a potentially higher-risk strategy to take advantage of the sell-off in equities over the long-term.

However, there is a specific group for whom the situation may not seem quite so obvious – those on the brink of retirement. They have been impacted one the one hand by reduced pension values, but also face the challenge of cuts to annuity rates. This is because government bond yields, which annuity rates are heavily influenced by, have shrunk as the Bank of England has slashed interest rates. Ten year gilts are currently yielding 0.47% and since the BofE introduced an emergency rate cut last week, annuity providers have reduced rates.

Commenting on the issue, Zoe Bailey, chartered financial planner at Tilney, says: “This is obviously a very uncertain and potentially scary time for everyone as we head in to the unknown and worry first and foremost about the health of our families. But those about to retire face a myriad of problems, with pensions values being hit hard by the stock market downturn, and also annuity rates being slashed as bond prices have rallied and their yields have fallen.

“Obviously the situation will change from person to person depending on your circumstances, but the most important thing to say is don’t panic and think carefully before acting.

“If you are able to, delay purchasing an annuity, where you do not have a guaranteed annuity rate built in, as the value of the income will be based on the value of your pension pot at the date of purchase. You should also review the option to have a phased annuity, which you can take over time rather than locking in a rate today. This will help when markets pick back up, as we expect them to once the pandemic has receded. Also, if you are able to, delay taking Tax Free Cash – up to 25% of your pension - if it is not urgent as this is also based on the value of your pension which will not be at its highest level during the current climate.

“If you are in the position where you have emergency cash savings, this is exactly the time to use it when you need. Don’t feel you can’t touch it during these times. If your pension income has suddenly reduced, for example, then use your cash reserves to top it up. You can rebuild it again afterwards with a plan from your financial adviser.

“As ever with your finances, you should only do what you are comfortable with, but my main guidance would be to not make any rash decisions. For the most part, even for those already in retirement, pensions are invested for the long term as they are specifically designed to support your income needs throughout retirement. For many people, it will simply be a case of riding it through.

“However, if you are feeling nervous about the future, or if the situation has made you feel more financially vulnerable than you predicted, then it would be worth looking at the risk profile of your portfolio as a whole. Reducing your risk now will mean you may not fully participate in the eventual recovery in equity markets, but at least you will reduce your exposure to a potential further downturn.

“Communication is key, and I would advise any one to speak to a financial planner about the best way forward. Whatever you do, now more than ever, don’t just automatically opt for the annuity offered by your existing pension provider as so many people do. It really does pay to scour the market when selecting an annuity but it is also important to consider the wider options with a good financial adviser before taking such a major decision.”

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.