Successive governments over the last decade have set clear objectives to keep interest rates and inflation low. Add to this the banking crisis of 2007/08, which has led to economic policies such as Quantitative Easing (QE), and the result is a massive effect on how much pension income you can buy with your pension fund.
All these factors have resulted in reducing the yields on 15 year gilts which is the primary factor in calculating annuity rates used to buy your pension income, along with predicted life expectancy, age and health. The yields on 15 years gilts have reduced from 5.25% in August 2007 to 2% in August 2012, which is in comparison to yield of 11% available in 1990.
With a further round of QE predicted and a proposed cut of interest rates from .05% to .25% expected before the end of this year, it is not unreasonable to assume that the yield from 15 year gilts will continue to fall, further impacting annuity rates and income.
Another impending change is that from December 2012 annuity providers will no longer be allowed to differentiate between genders when calculating annuity rates and this is likely to have a detrimental effect on some annuity rates (particularly for males or where joint life annuities are purchased). In appropriate circumstances, it may make sense to purchase an annuity prior to these changes taking effect.
If you have any questions regarding your retirement planning needs, please do not hesitate to contact one of our consultants.