While those who are some way from retirement have time for markets to recover, there will be others who are reaching retirement. While some of these may be able to defer making a decision in the hope markets recover, many will still need to take an income from their pension now, particularly those stopping work.
As markets are volatile there may be an instinct to look towards a conventional annuity where there is no investment risk. However, this is likely to be the wrong time to lock into a conventional annuity for many people. With falling fund values people are simply buying less income than they could have received last week, with no chance of recouping those losses.
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Example
Mr T had a pension fund worth £100,000. He could have bought an annuity worth £500 per month.
He has seen the value of his fund fall by 10% over the last week, to £90,000. He can now buy an annuity, on the same basis, worth £450 per month.
Over the 25 years of his retirement he will ‘lose' £15,000 in income.
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People may want to consider using a flexible annuity instead. This has a number of key advantages over conventional annuities -
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It gives scope for future investment growth to recoup losses suffered
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Any withdrawals benefit from reverse pound cost-averaging (i.e. not all money is being withdrawn at one time at what may be the bottom of the market)
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There is the ability to invest some or all of the fund in cash if people want to do that when markets are volatile
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People have the ability to vary the income they take. This could, for example, allow people to take the minimum possible income now and increase income once markets recover
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There is a minimum income lifetime guarantee for peace of mind
Andrew Tully, Pensions Technical Manager at MGM Advantage, said:
‘People shouldn't make long-term financial decisions based on short-term circumstances. While it may seem safe to use a conventional annuity where there is no investment risk, this is likely to be the wrong time to lock into a conventional annuity, as it gives people no chance of recouping recent investment losses. With conventional rates at their lowest for many years, and rising inflation meaning many pensioners are struggling to survive financially, taking a fixed income for life with no future potential for investment growth will have little relevance for many pensioners.'
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