BLOG: The new pension world – How much risk are you prepared to take?
I believe it is absolutely vital for retirees to carefully consider what investment risks they are prepared to take.
The ability to draw down from your pension pot may be attractive to many, but there is a lot to be said for the security of an annuity. If you opt for drawdown and you suffer investment losses, you may not be able to make up for these when you are retired, especially if you are no longer earning.
What’s more you still need an income in retirement so you potentially risk being hit by a “double whammy” if you need to take income from investments which are performing poorly, or possibly not even matching inflation.
With the exceptional current economic conditions of all time low interest rates since March 2009 coupled with low inflation, we have forgotten what it was like to live in a different economic environment.
I recall that while annuity rates peaked in the Thatcher years around May 1990, which gave a good retirement income, everyone faced high mortgage interest and inflation rates.
A comparison of 1990 to 2014 in the table below shows mortgages and inflation were circa three times more expensive as today and were followed by the housing price crash in 1991 when over 100,000 people lost their homes. Long term investment yields in 1990 also gave about three times more income than they do today.
|Bank base rate||13.88%||0.50%|
|Mortgage interest rates||15%||4.29% (5 year fixed term)|
|Estimated life expectancy of a 65 year old male||15.9 years||22 years|
|Estimated life expectancy of a 65 year old female||19.4 years||24.5 years|
|UK gilt 15 year yields||12%||3.11%|
|Inflation (RPI then CPI)||9.40%||1.70%|
The good news is that life expectancy estimations for 65 year olds have increased roughly by another five years both for men and women.
With the FTSE 100 inching clos to its 30 December 1999 all-time high of 6,930.2, we have witnessed the rise and fall of the share markets – some economists are already predicting the start of a bear market in 2015 – the year pensioners can use their savings as they wish.
So what about the future five years, now that we have got used to a 0.5 per cent base rate? No guesses which way this is going to go – it will only rise!
There’s no ‘one-size fits all’ solution and people need to take responsibility if they are to make the right choice for their individual situation when they retire in this brand new world.
Peter Quinton is head of annuities at Retirement Assured