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Drawdown 'to become default option'

Annuities at risk of becoming ‘unattractive’

pension pot 2Retirees will be pushed towards income drawdown as annuity prices decline in response falling gilt yields, says Alliance Trust Savings.

Annuity prices, which are based on the 15-year gilt yields, have declined considerably over the eight years since the global financial crisis, says one pensions expert.

Investors moving their funds to the safety of government bonds led to an increase in bond prices and a reduction in gilt yields.

The low interest rates in recent years have also made bonds more attractive than cash, pushing up the price of gilts. Post Brexit, 15-year gilt yields fell to an all-time low of 0.9% on 11 August.

Income drawdown allows retirees to take a portion of their pension fund as income while leaving the rest invested. Although this allows individuals greater flexibility and control over their pension pot, there is a risk of running out of money if people underestimate how long they will live and withdraw too much money too soon.

Brian Davidson, senior pension proposition manager at Alliance Trust Savings, said: “At such low prices, annuities will be unattractive for many more people, with the disadvantage of very low levels of income far outweighing the benefit of income certainty.

“Rates fell further following the Bank of England’s Monetary Policy Committee‘s cut to the base rate of interest at the start of August and, with speculation around a further base rate cut later this year, annuity rate rises seem unlikely.

“A ‘perfect storm’ has been created with the danger being that annuities will simply become unpalatable, resulting in more individuals considering drawdown as the main means of providing a retirement income.

“When considering non annuity based retirement income options though, it is essential that individuals give serious thought to their likely income needs throughout the different stages of their “retirement”, how long they are likely to live and the level of return (after fees and charges) that they need to make on the pension funds that remain invested to meet those needs.

“That will, of course, require a balance to be struck between risk and reward- the essence of all investment decisions. With this many “moving parts” informed advice will be invaluable.”

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