Sound Financial Group Blog

The Markets like QE2 but Pension investors are being hit by a double whammy. Falling equity values and rising Gilt prices spell bad news for those contemplating retirement...

The latest round of quantitative easing (or printing money if you prefer) to the tune of £75bn was greeted favourably by the markets last week and the FTSE 100 actually ended the week slightly higher than it opened, despite the usual round of doom and gloom emanating from Europe earlier in the week. Whilst the long-term consequences of such action are unknown, in the short-term whilst it appears to have eased the nervousness in the markets to some degree, for those who are at or near to retirement this spells more bad news.
With the fall in the value of equities by around 12% or so since May 2011 many pension investors who have equity exposure will know that the value of their retirement funds have fallen. However with the price of gilts continuing to rise, gilt yields are falling and they will ultimately dictate annuity rates, which then turn pension funds into income by way of annuity purchase.
The latest round of QE has injected £75bn into the system by buying gilts and this is again driving prices higher and yields lower. So what can those near to retirement do if the value of their projected income is likely to fall, perhaps below the level that they need to live on? In essence they can put off taking benefits until such time that rates improve, but of course there is no guarantee that this will happen and in the mean time they may need income.
Alternatively they can shop around for the best annuity rate from within the open market, as annuity rates will vary between providers. Also annuity rates can depend upon health and lifestyle and therefore can be higher for those with heath issues and/or smokers for example.
A form of pension ‘phasing’ may be beneficial to effectively spread their annuity purchase over a longer period of time to hopefully benefit from increasing annuity rates.
All in all there is no right or wrong answer as much will depend upon the needs of the individual and their personal financial situation. As always professional advice is recommended from an independent adviser qualified to do so.
The first step is always to establish the level of income you are likely to need, and escalate this long into the future. You can then add the variables such as inflation and investment return to calculate the income you require, remember to leave a little in reserve for changing circumstances and emergencies. Our unique financial planning software can help with this calculation to ensure you eliminate the risk of running out of money. 
If you wish to discuss your own pension planning strategy or would just like a second opinion on your current pension arrangements, please contact us and take advantage of a no cost or obligation meeting.