Chancellor Jeremy Hunt now appears to have resigned himself and the country to the fact that Britain will follow Germany into a recession as a result of attempts to bring inflation under control.
Pensioners: sit tight and consider annuities
Final salary or “defined benefit” pensions are unaffected by market movements and payments are pegged to inflation (though are often capped at 5pc a year in the private sector).
Today most people have defined contribution schemes, where pensions are invested in the stock market. So far, the effect on the FSTE 100 index of the biggest London-listed companies has been muted.
There is no reason for pension savers to panic, but, as always, it is important to limit withdrawals to what you need in the short-term.
Taking money out of a pension while markets are depressed is a poor strategy as you miss out on any future stock price recovery and your money loses value when left in cash.
One financial product that does gain from rising interest rates are annuities. Now largely out of favour, these insurance contracts are priced largely on life expectancy data and the yield on government bonds, or “gilts”.
Annuity rates have risen considerably over the past two days. A 65-year-old with £100,000 can currently buy an annual, single life annuity income of £7,240.
Annuities last reached these levels late last year and are at highs not seen for more than a decade. At the start of 2022, the average rate was around 5.1pc. But now, retirees can get over 7pc. That’s around £2,000 or more a year, per £100,000.
Mark Ormston, a director at annuity brokerage Retirement Line, said: “Where else can people get 7pc returns and more, guaranteed for life?”
In the thick of a cost-of-living crisis, many pensioners on fixed incomes have already slashed their energy consumption and cut down on inessential expenditure. Now, it might be time for this cohort to look at ways to make their pension pots go further.
Andrew Tully, of pension provider Canada Life, described it as “a balancing act” between taking income to support increased costs now and trying to make sure a pension pot lasts throughout your lifetime.
He added: “For those people already in drawdown, investment strategies and retirement plans will have factored in certain assumptions around income needs, but it takes bravery to stay the course.
“Diversification is key, as is the ability within any financial plan to flex between income sources where possible.”
Pension holders invested in a range of asset classes will be the most shielded from the ravages of inflation, he explained, and those with an income strategy which minimises tax will be doubly insulated.
For those still working, Mr Tully expected people to cut back on their pension savings as wages have to stretch further to cover rising costs.
On the flipside, he said there could also be a rise in over-55s returning to employment after retiring early during the pandemic but who now realise they can’t afford not to work.
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