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Keep Calm and Carry On… Working?

Keep Calm and Carry On… Working?

The latest figures from the Office of National Statistics showing that the UK has experienced its third quarter of economic decline is bad news for those heading towards retirement. The ONS reported that GDP shrank by 0.7% in the second quarter of 2012, following falls of 0.3% and 0.4% in the previous two quarters.

While they are forecasting positive growth in the third quarter of 2012, some of this will be based on a temporary boost from the staging of the Olympic Games in London. Overall, the picture painted is one of economic stagnation for the foreseeable future.

This is going to reignite the debate about what the Bank of England should now be doing in order to get more cash into a depressed economy. The recent extension of quantitative easing was a bare minimum; nobody felt it would give the economy the level of stimulus required.

The voices calling for more dramatic intervention by the BoE will grow louder, fuelled by this latest evidence of sluggish economic activity. The IMF, normally a bastion of economic prudence, has already called for a brake to be applied to the austerity economics and urged a loosening of economic policy in its recent report on the UK economy. It is going to be difficult for the BoE to resist the calls to pump even more cash into the economy via gilt buying, ensuring that yields go even lower and the rates for annuities descend with them.

This will mean that anyone retiring over the next two years is going to get very poor value for the pension pots that they have worked so hard to accumulate if they buy a conventional annuity.

It is difficult to know what advice IFAs should give to prospective retirees who walk through their doors for the next while. Advising people to take out a conventional annuity when rates are this low is a bad idea, as people would be locking in their pension at a very low level. But what alternatives are out there?

A fixed annuity is one answer, postponing the purchase of the full annuity until the end of fixed-term in the hope that annuity rates will recover. However, that would have seemed a good idea three years ago and yet rates are now much worse than they were then. There is no guarantee that they will be much better in the near future and possibly they could be much worse.

Drawdown may seem another obvious alternative but the success of drawdown products lies in the ability to grow the investment while drawing down from it and this level of risk is not suitable for everyone. Also, the government’s recent restriction of the amount that can be taken in payment from 120% to 100% of the GAD rate is a significant restriction. Who can tell it won’t happen again?

Variable annuities have some attraction allowing for the upside of investment growth while protecting against a collapse in the market, ever a possibility as the Eurozone turmoil continues to affect markets worldwide and shows no sign of easing off. But many, particularly those with smaller pension pots, may find the risk level is too high for them.

The current economic background leaves it very difficult to find a secure solution without opting for the low-risk, very low return conventional annuity. Maybe the best advice an IFA can give a potential retiree is to carry on working.

Tom Murray

Twitter: @TomMurrayDublin

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