Safety may affect retirement income

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Why Investment “Safe Havens” may affect your retirement income

With the recent turbulence in financial markets, many investors, perhaps unsurprisingly during this volatile period, have looked to invest or switch investments into deemed more cautious “safe haven” assets, into “Gilts”, for example. The impact of this increased demand, and therefore, increasing cost for purchasing this asset class has resulted in ongoing reductions in the returns (called the yield), particularly from government issued bonds, or “Gilts”.

The yield is the interest generated by the bond (gilt). For example, if a bond when issued has a price of £100, and the interest is £5, then the yield is 5%. However, if this bond is then sold for £110, the yield has reduced to 4.5%. Therefore as prices of gilts rise, the yields fall.

This reduction in gilt yields over the last few years is one of the key factors why we have seen pension annuity rates reduce over the same period. Consequently, although this is not the only factor those of you looking to establish your pension income by purchasing an annuity, will now receive less pension income, as compared to a few years ago with an equivalent valued pension fund.

For the immediate future, other factors may affect annuity rates, keeping them at the current low rates, even if gilt yields start to increase in value, namely:

European Court of Justice ruling

The other major factor is life expectancy, which is traditionally greater for women than for men. The European Court has ruled that pension providers cannot discriminate between genders; annuities therefore must be based on non-gender-specific rates.

This means that annuity rates for women should rise, however, potentially annuity rates for men could fall to equalise at the lower level. At this early stage it is difficult to judge how the ruling, which is due to come into force from December 2012, may affect annuity rates for the future.

Solvency II

Solvency II is an EU regulatory requirement which is due to come into force in the UK in 2014. This determines that companies which offer guarantees (such as annuities) have to hold a large proportion of government bonds (gilts). At the moment most annuity funds hold a mixture of government bonds, corporate bonds, and property, but if the proportion of government bonds increases, the returns on the fund will decrease. Therefore we might see a further decrease in annuity rates.

The good news however is that there is no requirement to purchase an annuity, and there are options that would allow you to draw an income, without committing to annuity purchase. Unfortunately, one of the main alternatives, namely, “Income Drawdown” will also be affected by the lower yields from gilts, as the level of income available from a Drawdown arrangement is determined by the GAD rate, which in turn is based on the gilt yield. Thus the maximum level of income will now be lower than a few years ago. Importantly, this will also affect existing Drawdown schemes for anyone reaching their five-yearly review.

With the level of income from retirement funds reducing; for many it may require supplementary income sources to be made available, i.e. from investment capital. We therefore recommend you obtain independent advice to ensure that, whichever route is selected, is appropriate and suitable for you.

For further information please contact Siddalls France, who have been providing independent financial advice to the British community in France for over 15 years. www.siddalls.fr tel: 05 56 34 75 51