I read an interesting report which showed that 10 million people in the UK (a third of the working population) are not saving for retirement. That will be an interesting demographic time bomb; you can expect strong measures in terms of employer and employee compulsion into pensions to follow.
Further still, a report from Standard Life has shown that many of these people will need to work until they are 74 to 86 year old to achieve the holy grail of two thirds of their retirement income.
If we consider that the average life expectancy at birth in the UK is 78, that makes very boring reading.
As a side, Andorra has the highest life expectancy in the world at birth of 83.5. Two other ‘tax havens’ of Guernsey and Monaco are also higher at 80 and 79 pointing to the clearest evidence needed that the biggest killer is indeed tax.
Having used (twisted) the statistics to suit my argument above, the fact does remains however that those who actually make 65 years old will typically have 17.2 years in retirement (19.9 for women).The previous statistics are related to longevity at birth. Once the key ages of risk have been passed the longevity surges, so a 65 year old living today might expect to live until the ripe old age of 82 and rising.
With that in mind many retirees looking at their annuity funds today will be focusing on how exactly they can make the most from them.
What is an annuity?
You save into a pension, whilst boring, the most tax efficient way you can save – fact (at basic rate tax alone the investor into a pension receives an immediate uplift of 25%.)
The fund grows until retirement and you have a choice what you do at age 65. Take it, leave it until 75 or plan now for alternatives.
There are many factors that will sway you one way or another and you should ask these questions before deciding to take the pension.
Once you have taken your annuity there is no going back so it needs careful consideration. Is now the right time to take the pension? Will annuity rates increase in the future? Annuity rates are closely linked to gilt rates which of course will have been battered by quantitative easing (on purpose).
If quantitative easing has its desired effect there is the danger (high probability and probably good for the government as inflation erodes the cost of debt) that inflation kicks in.
If it does will interest rates rise to curb inflation? At the same time if the bank of England decides to sell back its newly purchased gilts during the quantitative easing process their price will fall and the yield will rise. If you have locked into an annuity rate today you might well be miffed.
In the meantime if quantitative easing has had its desired effect there is also the impact on your fund. If you have secured an annuity today it will be with that fund size.
Quantitative easing, along with low interest rates having the desired effect on the economy, will clearly have a positive effect on equities and in return your fund.
If your fund rises you have more money with which to purchase an annuity and also, if quantitative easing has worked, a higher rate at which to purchase. Consider a 65 year old with a £100,000 fund who buys an annuity today at 7.17%. This is considerably less than the 7.92% achieved last year.
Imagine if annuity rates, because of inflation and the positive economy only returned even to last years figures (they were near 15% in the early 1990’s). Imagine that in that same year the market returned 20% in the next year (the FTSE is up 43.7% of its 52 week low).
The retiree now has a bigger fund to take with a bigger annuity rate. In this instance the latter will earn 32.5% more over their retired life. There are a number of other factors to consider which I will cover next week.
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