The global recession that began with the credit crunch in 2007, and has affected most developed nations’ economies, has had a significant impact on retirement incomes. A combination of weakened pension assets and investments, as well as downward spiraling annuity rates have hit current and would-be retirees in the pocket, hard.
In order to attempt to stimulate the economy, policy makers in the United States and Europe have been enacting what is known in economics as quantitative easing. This, put simply, is the policy of printing more cash into the economy.
One of the effects of this is that it increases monetary inflation. That means what you can purchase with a dollar or a pound is not as much as you could have a year ago, and so on. Which is to say that, the money you have saved in your pension - each dollar, pound and euro of it - is decreasing in value in real terms every day.
That said, as pension funds are invested in assets with the aim of these providing growth, the interest you are receiving may cover the inflationary costs. However, since 2007 many pension funds have taken sizeable hits or struggled for growth. It is highly recommended you review your pension policies and make sure they are up to date.
Both in North America and Europe, pension annuity rates have been falling for decades, predominantly due to lengthening life expectancies. Because people are living longer, their pension pot funds must be spread out over a greater number of regular payments from their annuity provider. This means that the rate offered, which is the percentage of the total fund value that is paid out each year to the retiree, is lower than previous years when life expectancies were shorter.
The uncertain global economic climate has also caused annuity rates to further suppress by impacting gilt returns.
Geoff Alderton, annuities expert at the Banking Times explains; “Gilts are a form of government bonds that annuity providers are invested in. Due to low confidence in global stock markets, demand for government gilts has increased greatly as these are seen by investors as a relatively safe investment.”
The high demand for gilts has pushed their prices up and resulted in lower returns on these investments. In general, lower gilt returns mean lower annuity rates.
Whilst the economic climate is not helping pension values or annuity rates, it does not mean you should be cancelling or pushing back your retirement plans necessarily.
What is critically important, however, is that you speak to an independent financial advisor as soon as possible. They have access to the best annuity rates and can help you make an informed decision on when to retire and what financial planning is best suited to your needs
Put simply, retirement income planning procrastination can cost you thousands in lost income for your retirement. Make sure you are on top of your pension plans and in a good position to purchase your annuity when the timing is right for you.
Written by Emma Wilson, freelance journalist and correspondent at the Banking Times.